On Monday, 30 March 2026, the S&P 500 bottomed at 6,343.72. Stock prices had been battered in the month after the Iran War geopolitical conflict started, falling 535.16 points (7.8%) from the close of trading on Friday, 27 February 2026, the day before it began.
Then came word the conflict was likely to get worse. Oil prices surged. The possibility the U.S. economy might contract began to be seriously considered. All signs seemingly pointed to a bigger downward move for stock prices.
But then, something else happened. Stock prices began to rise as investors considered what those possibilities would mean. And what they saw was a Federal Reserve that had been considering hiking interest rates take them off the table instead.
Stock prices continued their new rally after a two-week cease fire was announced in the geopolitical conflict a little over a week later. Then 2026's second quarter earnings season got underway and investors were treated to some of the best earnings reports they had seen in years, combined with improved business outlooks for many companies standing to benefit from the buildout of Artificial Intelligence (AI) system infrastructure.
In the weeks since, that pattern has continued. The Iran war cease fire has been extended several times. In the stock market, companies kept reporting much better than expected earnings and business outlooks. Stock prices have taken off like they were strapped to a Spacex rocket, to name one firm whose imminent Initial Public Offering (IPO) is exciting the investing world. Through the close of trading on Friday, 29 May 2026, stock prices have increased by 16.3% above where they bottomed on 30 March 2026.
A month ago, when we looked at the value of the S&P 500 with respect to its underlying dividends per share, we weren't surprised to see the index was on track to make a full recovery from its geopolitical swoon. But now that it has, the rise of stock prices hasn't slowed down very much, which makes it different from previous recoveries in recent years. Instead, they are almost within a single standard deviation of crossing a critical level that would represent a breakdown of the relative order in the stock market that has been in place since 31 December 2023. The following chart presents the phenomenal rise of stock prices from 30 March 2026 through 29 May 2026 in the context of that relative period of order.
From where it closed on Friday, 29 March 2026, the S&P 500 would need to rise a little over 300 more points, or almost 4.0%, before the end of the quarter to break through the upper red dashed line that would potentially represent a break down of order in the stock market. We say potentially because just crossing the line isn't enough to qualify as a break down in order. Stock prices would have to be sustained above that upper threshold for long enough to rule out the possibility that it's just a simple statistical outlier. Much like how we determined the current period of order did not break down after stock prices broke below the lower limit back in April 2025.
But that's not all there is to need to be concerned about. This rally might qualify as a stock market bubble according to our working definition:
An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset.
For stock prices, the income that might be realized from either owning or holding stocks are dividends. As shown in our chart, the rocketship ride of the S&P 500 in the last eight weeks is very close to qualifying as the inflation phase of a bubble.
What could possibly go wrong?
Aside from the now-classic example of the Dot Com Bubble, we've seen something like this pattern in historic data at least two other times. Once was before the Black Monday Crash of 1987. The other occurrence dates back to 1929, which defines an event we refer to as the Ultimate Sell Signal.
Which is not to say that stock prices are destined to immediately crash if they cross that upper threshold. The Dot Com Bubble inflated for years before it entered its deflation phase. What we can say is that if stock prices rise above that upper threshold and stay elevated above it, the stock market will have entered into a chaotic phase. Investors will need to adapt accordingly.
Previously on Political Calculations
- How Big is the AI Bubble and Is It Really a Bubble?
- The Definition of a Bubble
- The Ultimate Sell Signal
- What Caused the Dot Com Bubble to Begin and What Caused It to End?
- The Black Monday Stock Market Crash Explained
- Not Necessarily Wrong But Useful
Image Credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Wall Street bull and bear riding on the outside of a rocket that is accelerating after launch".
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Closing values for previous trading day.
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