Taking the temperature:
are markets overheated?

Over the coming months, financial markets are likely to be shaped by three highly significant public listings: SpaceX, the private aerospace and satellite launch company, and Anthropic and OpenAI, two leading developers of large-scale artificial intelligence (AI) models.

Large public listings often feel like late-cycle signals. They tend to emerge when investor confidence is high, valuations are supportive and capital is readily available. The question, however, is whether these conditions genuinely point to excessive optimism or simply reflect a healthy market environment. To answer this, it is useful to turn to the market temperature framework of Howard Marks, founder of Oaktree Capital Management.

Rather than attempting to predict the future, the framework focuses on assessing investor psychology to determine whether markets are becoming dangerously ‘overheated’ or attractively ‘frigid’.

First set out in a 2006 investor memo, against a backdrop of abundant liquidity and rising risk-taking ahead of the global financial crisis, it was designed to help investors judge market conditions by observing behaviour rather than forecasting outcomes. The objective is not to predict short-term market movements but to provide a structured way to gauge prevailing sentiment and the balance of risk in financial markets.

What emerges is a picture of a global market that is indeed warming – but that still shows important signs of restraint.

A snapshot of today’s market environment

Below is a summary of how we currently see the market across the key dimensions of Marks’ framework:

Where the market is clearly warming

Each indicator is informative in its own right. But rather than focusing on each in isolation, it is more useful to consider the overall pattern. On that measure, several areas suggest a market that is running warmer than it was a few years ago:

• Capital markets are open. Companies can raise funding and investor appetite for new listings has improved noticeably. This backdrop provides fertile ground for large transactions and helps explain why companies are choosing this moment to list.
• Credit markets are displaying confidence. Credit spreads remain tight, signalling strong demand for yield and a willingness to accept relatively low compensation for risk. Historically, this has tended to occur later in the cycle rather than near the beginning.
• Asset prices in parts of the market are no longer cheap. While this is not true across all regions and sectors, valuations in certain areas – notably large US growth stocks and companies linked to AI investment – sit above long-term averages.
• Recent market performance has been strong, but highly concentrated. A relatively small group of companies has driven a disproportionate share of overall returns. This narrow leadership is an important clue, suggesting enthusiasm is concentrated in specific areas rather than spread broadly across the market.

But it’s not yet a market in mania

Despite these signs of warming, several important counterweights remain in place.

The economic backdrop, while resilient, is not running hot. Growth continues, supported by structural investment themes, but against a more complex global environment. Elevated geopolitical tensions have pushed up energy prices and revived concerns around stagflation – a combination of slower growth and persistent inflation. These factors create uncertainty and act as a natural restraint on excessive risk-taking.

Interest rates are another important constraint. Unlike previous late-cycle periods, this is not an era of ultra-cheap money. Rates remain high enough to influence investment decisions, particularly in capital-intensive sectors and interest-sensitive areas of the economy.

Lending standards also remain relatively disciplined. Credit is available, but it is not being extended indiscriminately. This has limited leverage-fuelled speculation and reduced the risk of excess building up unnoticed.

Investor psychology, meanwhile, appears mixed rather than euphoric. There is clear enthusiasm for certain opportunities, but also a persistent degree of scepticism. Investors continue to question assumptions, differentiate between winners and losers, and remain alert to valuation risks.

This is perhaps most visible in private markets. While public markets have regained momentum, parts of private credit and private equity remain under pressure. Fundraising is selective, exits are challenging and some investors are prioritising liquidity. The contrast is a useful reminder that not all corners of the financial system are overheating at the same time.

Interpreting the forthcoming public listings

The upcoming public listings are notable for their concentration. SpaceX, Anthropic and OpenAI all sit within the fast-growing ecosystem surrounding AI and the infrastructure that supports it – an area where capital, enthusiasm and growth expectations have been particularly strong.

Seen in this light, these listings are less a sign of a broad-based reopening of the market for new listings and more a reflection of exceptional momentum within a specific segment of the market. This distinction matters – it suggests that while investor appetite in these themes is robust, it remains focused rather than diffuse.

What this means for portfolios

The market is warmer than it was earlier in the cycle, but it has not yet reached the kind of widespread exuberance that typically precedes major peaks. Leadership is narrow, risk is more finely priced and the margin for error has shrunk, but the investment environment remains constructive.

For portfolios, this reinforces three core principles:

• Stay invested. Pulling back wholesale from markets due to concerns about rising temperatures risks missing ongoing opportunities, particularly when structural growth themes continue to support earnings.
• Remain selective. This is not a market where broad exposure alone is enough. The gap between strong and weak opportunities is widening, making careful security selection increasingly important.
• Stay anchored in fundamentals. As expectations rise, cash flows, balance sheet strength and realistic growth assumptions matter more. Narratives alone are unlikely to sustain returns indefinitely.

Periods like this rarely lend themselves to bold market-timing calls. Instead, they reward discipline, patience and a clear focus on quality.