Irrational Exuberance in the U.S. Equity Market

GMO

Jeremy Grantham

Article

1 Pages

April 2000

The authors examine how irrational exuberance in technology stocks intensified pressure on value managers in early 2000. They argue that optimism temporarily displaced traditional measures such as earnings, book value, and dividends, while maintaining that independence and discipline could support stronger long-term investment decisions.

Key Takeaways

Speculation Over Fundamentals: Puma reached a $14 billion valuation on $24 million in sales before falling 80% within 4 weeks.

Value Spread Widens: By March 2000, valuation gaps between growth and value matched or exceeded extremes last seen in the early 1970s.

Reversal Potential: With the Nasdaq down roughly one third, GMO estimated historically cheap value stocks could outperform by more than 80%.

Markets Diversification

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