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There are certain market phrases that never leave us, and the passing of their creator is a poignant reminder of their wisdom. One of them is Alan Greenspan’s immortal warning about “irrational exuberance.” In his December 5, 1996 speech, Greenspan asked whether investor enthusiasm had “unduly escalated asset values” in ways that could end badly.
It was a fair question then and it is fair to ask now given today’s omnipresent client refrain: “Are we in an AI bubble?”
And that brings us to an eloquent new Andrew Slimmon Ism:
Bubbles don’t peak in rationality.
In this Coach’s Corner conversation, David Richman again sits down with Andrew Slimmon to get his most recent take.
David Richman:
Andrew, let’s start with Greenspan.
When people remember “irrational exuberance,” they think bubble, mania, warning signs, late-cycle euphoria. That phrase has become shorthand for markets getting ahead of themselves. Your new Ism “bubbles don’t peak in rationality” feels like the perfect counterweight. Can you expand?
Andrew Slimmon:
Not every powerful trend is a bubble, and not every correction is a collapse.
When I think about a true bubble, I think about two ingredients. First, expectations for revenue and earnings growth become far too high. Second, investors apply excessive valuation multiples to those expectations.
Let’s take these two ingredients and apply them to what we are seeing across many of today’s first-order AI beneficiaries, semiconductors, memory, networking, and infrastructure. I see many companies trading across these baskets in what seem to be reasonable forward P/Es. In some cases, lower multiples reflect investor awareness that these earnings may be cyclical. This is not irrational; it is completely rational behavior. Bubbles don’t usually end at the point where investors are behaving rationally.
David:
Such an interesting and critical distinction, Andrew.
Greenspan’s concern was that enthusiasm itself could begin to distort prices. Your point is that enthusiasm alone does not make something a bubble. What matters is whether the market has abandoned discipline.
Andrew:
Exactly.
AI as a technology is not the bubble. The internet itself was never the bubble either. The question then, just as now, is whether the stocks tied to the innovation are being valued in a way that assumes too much, too soon. When I look at the current setup, I do not see the same kind of indiscriminate valuation excess that defined the late 1990s peak.
That doesn’t mean there won’t be corrections. There absolutely can be. A correction is not the same thing as a bubble bursting.
David:
Another important distinction for advisors and investors alike.
Because one of the easiest mistakes in markets is to confuse volatility with invalidity—to assume that if an idea gets crowded, it must also be wrong.
Your recent commentary suggests something else, that fundamentals have actually been stronger than expected.
Andrew:
Yes, and that’s a big part of the story.
One of the reasons I’m hesitant to use bubble language is that Wall Street is underestimating the degree of improvement in many AI-related businesses. Revenue and earnings revisions over the last year have been significant. So far, the fundamentals have been surprising to the upside, not disappointing to the downside.
And that matters. If the market had gone straight up while earnings expectations were deteriorating, concerns would be much higher. When earnings revisions are strong, the move takes on a different character. It suggests there is substance underneath the story.
David:
That also lines up with something we discussed recently: maybe this is less like the early 2000s and more like 1997.
In other words, powerful technology is clearly taking hold. Capital is pouring in. Investors are excited. The environment still contains enough fundamental support to keep the story grounded.
Andrew:
That’s a fair way to frame it.
There’s no question AI is a major technological shift. It’s a productivity tool. It’s a cost-savings tool. It’s beginning to show up in real business decisions, real workflows, and real return-on-investment conversations. That is an important difference. We are not talking about abstract future possibilities. We are talking about companies actively building because they believe the economics justify it.
From the conversations we are having with companies, demand appears to be growing faster than capacity. That matters too. It suggests this cycle may last longer than many pundits think. In my view, several forces are driving that: AI is improving productivity, usage is rising quickly, hyperscalers are earning strong returns on their capex, and policy incentives tied to capex and R&D can reinforce further investment.
David:
If I were to translate into plain English for advisors to use with clients and prospective clients, it might sound like this:
Market enthusiasm is being carried by something real—genuine business adoption, genuine spending, and genuine earnings follow-through.
That is not the same thing as blind speculation.
Andrew:
Right.
There is one pocket of the market that warrants attention: momentum investors.
In my most recent commentary, I made the point that there are essentially two kinds of investors in AI beneficiaries. There are those who believe in the buildout and the fundamentals. There are those simply chasing price strength because the trade has captured the zeitgeist. That second group can create instability. If momentum gets crowded, those investors can reverse quickly at the first sign of weakness.
That’s where you can get sharp corrections even when the broader fundamental story still makes sense.
David:
Which brings us back to Greenspan.
One of the lessons within Greenspan’s “irrational exuberance” warning is not that it tells you the exact top. It didn’t then and it still doesn’t. It reminds investors to ask a more subtle question: What exactly is driving prices here? Is it disciplined conviction? Or is it psychological contagion?
In your framework, the answer right now is: there is not enough valuation excess to call this a bubble.
Correct?
Andrew:
That’s right.
Also, humility matters here. Nobody is very good at predicting exactly when expectations have gone too far. Investors should be cautious about assuming that anyone has all the answers. Which is why portfolio construction matters.
History also tells us something important: transformative technologies often create anxiety before they create clarity.
David:
You have provided some great context here to help us reflect upon today’s environment. Afterall, Greenspan’s question still matters: How do we know when exuberance has unduly escalated asset values?
Your insights perhaps can provide us with a terrific template for “bubble patrol”:
Look at valuations.
Look at earnings revisions.
Look at whether adoption is real.
Look at whether the market is being driven by fundamentals or by pure momentum.
Look for rationality.
If rationality is still visible, we are likely not at the end of the story.
Bottom Line
If Greenspan taught investors to watch for irrational exuberance, Slimmon reminds us to also watch for its counterpart: evidence that markets, at least for now, are still tethered to something real.
That is the key distinction.
Not every powerful advance is a bubble.
Not every correction is a verdict.
Not every era of enthusiasm ends in collapse.
AI in Practice
AI in Practice is a new Advisor Institute program dedicated to helping financial advisors navigate and capitalize on the rapid rise of artificial intelligence from both an investment and practice management perspective.
Stay tuned for our next blog post “AI: The Ironic Twist.”
