The American stock market increasingly behaves less like an allocator of capital and more like a mood disorder with a Bloomberg terminal.
This week supplied the clearest evidence yet. MicroStrategy, a once-ordinary software company that has reinvented itself as a Bitcoin warehouse with a Nasdaq listing, briefly traded below the street value of the cryptocurrency it already owns. The coins did not disappear. The debt did not explode. The financial statements barely twitched. What evaporated, almost overnight, was belief. For months, investors had been happy to pay a premium for the privilege of owning Bitcoin through Michael Saylor’s eccentric corporate wrapper. Then the mood turned and the wrapper suddenly looked flimsier than the asset inside. The market repriced the story, not the balance sheet.
This is the part of finance that academic models struggle to capture and traders understand in their bones. Prices are not just estimates of discounted future cash flows. They are flickers of collective conviction, a rough census of how many people still believe the tale and how fiercely they believe it. When conviction is abundant, markets feel like perpetual-motion machines. When it drains away, value collapses faster than any fundamental deterioration could ever justify.
The past 12 months have been littered with these moments. Mega-cap technology companies added trillions of dollars in market value on the thinnest sliver of actual earnings growth. “AI optimism” became a line item that somehow justified 40 and 50 times earnings. Certain consumer brands turned into passports to a broader social narrative about health, discipline, and aspiration. Entire countries now trade at premiums that owe as much to comfort as to arithmetic. Global capital feels more at ease with Delhi than with Beijing, and that preference shows up in price.
None of this is entirely new, of course. My grandfather would have recognised the pattern instantly from the Bombay market of the 1970s. A textile company’s shares would leap because a minister’s cousin was rumoured to be interested in the promoter. They would slump if the monsoon arrived late, even though the factories were indoors and the cotton was imported. The trading floor had all the paraphernalia of modern finance, but the real action took place in the coffee houses around Dalal Street. The numbers moved because the stories moved.
Mood over balance sheets
We tell ourselves that things are different now. Information travels at the speed of light. Disclosure is near-perfect. Algorithms execute in microseconds. Yet the emotional circuitry remains remarkably primitive. When Silicon Valley Bank failed in March 2023, customers tried to withdraw roughly $40 billion in a single day. Regulators later revealed that even larger sums were queued up had the bank opened the next morning. This was not a gradual reassessment of asset quality. It was a run of the old-fashioned kind, only coordinated through group chats and email threads instead of queues around the block. Many of the people rushing for the exit were sophisticated investors who model risk for a living. I was still at Goldman then, and even in an office that prides itself on its sangfroid, the change in atmosphere was unmistakable.
Blaming technology is the easy answer. The easier it is to trade, the more people will act on their nerves. That explanation is only half true. Seventeenth-century tulip bulbs fetched many times a skilled worker’s annual income. In the 1840s, British investors poured so much into railways that Parliament approved more than 200 new lines in a single year, far beyond what the country could possibly need. Between 1995 and 2000, the Nasdaq rose roughly 400 per cent and then gave almost 80 per cent of it back in the three years that followed. In each case, investors responded less to balance sheets than to mood. The present era feels distinctive only because the sums are larger and the swings faster.
Seen from this angle, much of what currently passes for market “mystery” becomes self-explanatory. The valuation of a business is, in part, a referendum on whether investors believe the world will still reward its logic ten years from now. American technology companies are priced not just for growth but for cultural leadership. India trades at a premium not because its metrics are miraculous but because global capital is more comfortable with New Delhi than with Beijing. The comfort is as real as the cash.
Nations have been priced this way before. In the 1980s, it was Japan. In the 2000s, China. For a brief period before the financial crisis, Europe convinced itself it had cracked the code for a post-capitalist prosperity. The market treated each claim as plausible until it suddenly did not. Investors do not re-rate slowly. They withdraw conviction.
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Not all optimism is mania
Finance likes to pretend that these moments are aberrations. Liquidity distortions. Excess retail participation. A behavioural glitch that the algorithm will iron out. It is an oddly reassuring story because it assigns the disorder to circumstances, not to us. The alternative explanation is less flattering. Markets are emotional machines built by emotional animals. The data is tidy. The organism interpreting it is not.
None of this renders fundamentals obsolete. Over time, the ledger does its work. Businesses that never earn money eventually lose their audience. But there are long stretches, measured in years, when valuation is awarded on the basis of narrative force rather than operational performance. Numbers in those episodes take on a decorative role. They illustrate the story but do not govern it. In Professor Hanno Lustig’s classroom, risks line up neatly. In markets, they do not. They move with whatever mood happens to dominate the room.
The sensible question, then, is not whether markets are irrational. They have always been irrational. The question is how to operate in a system where belief can add or subtract a trillion dollars of value before anyone has checked the balance sheet. One response is opportunism. Trade the story while the audience is still applauding. Another is fatalism: everything is vibes, so why pretend otherwise. A more adult response is to distinguish between narratives that can survive contact with time and those that cannot. Not all optimism is mania. But most manias dress as optimism.
This demands a kind of literacy that balance-sheet analysis does not teach. An ability to sense when the narrative is doing the heavy lifting. To detect when enthusiasm is not a by-product of evidence but a substitute for it. To notice the moment when a question stops being asked because everyone is afraid of the answer.
Markets do not break because the arithmetic fails. They break because conviction evaporates. And conviction evaporates for reasons that rarely show up in models. The threat to investors is not ignorance; it is confidence acquired too quickly and abandoned just as fast. A portfolio is not only a claim on future cash flows; it is a claim on a future audience that still cares about them. That audience can change its mind overnight.
The prudent investor understands this. Not by refusing stories, but by pricing the fragility of belief. The most expensive thing in markets is not growth or scarcity or innovation. It is certainty. And certainty is the one asset that cannot be held for long.
The author is a student at the Stanford Graduate School of Business. He was previously a vice president in the private equity group at Goldman Sachs. He tweets @ak47who. Views are personal.
(Edited by Aamaan Alam Khan)