Research has identified three major episodes characterized by sky-high market valuations that ended in substantial downturns: the late 1990s dot-com bubble, the pre-global financial crisis of 2007, and the speculative surge in 2021.
- At their peaks, market valuations, measured by metrics like the cyclically adjusted price-to-earnings ratio, reached levels seen only twice more in the following decades, illustrating how markets can remain in irrational optimism until a catalyst triggers a reversal.
- The calm during these periods sowed the seeds of complacency, as noted by economist Hyman Minsky, leading to destabilizing risk-taking, which was exacerbated by interconnected global financial systems and later influenced by the Covid-19 pandemic and subsequent economic measures.
