“We can grow 4%,” said the business journalist and former Donald Trump advisor Larry Kudlow after the US stock market set new records last week. “The Fed has 5,000 PhDs,” he said, channeling the administration’s claim that the establishment just doesn’t get how the economy is being supercharged by its policies. “Why don’t they know that?” Few independent analysts share that confidence, though. Most are puzzled by the resilience of US markets amid the turbulence of the second Trump administration and the uncertainty its policies have injected into trade relations and the labour market.
The most common explanation one hears for the continuing rally stateside is that investors are pricing in the phenomenal productivity growth being unleashed by the AI revolution. Those espousing this viewpoint to the regular ratcheting-up of earnings expectations among market analysts as evidence, arguing that rising optimism regarding future profits suggests investors are already seeing the benefits of the boom. With firms planning investments of some $3 trillion in AI over the next three years, they argue, the potential payout ahead should the technology live up to its hype could well be massive.
Except, there’s a minor flaw in that reasoning: if AI really explains the American market’s performance, that may be a bad omen. A gain since the start of the year of 13% for the S&P 500, or 17% for the tech-heavy NASDAQ, might sounds mighty good, but only until you see what’s happening in other markets. Investors are hedging their dollar holdings, which suggests they’re getting anxious about long-term exposure to the US. As a result, the dollar is 10% weaker than it was at the start of the year, cancelling out most of the gains in US share prices.
Meanwhile, over the same time period, Germany’s market gained nearly 20%, Italy’s even more, Spain’s more than 30%, and Greece’s over 40%. Meanwhile, the markets in Mexico, Brazil and Canada all appear to be shrugging off the effects of Trump’s tariff war, with all of them up more than 20%. Over in Hong Kong, the market is up a third since the year began. But none of these can hold a candle to what’s happening in Africa’s markets: Nigeria’s market is up 40%, Kenya’s nearly 50% and Ghana’s a dizzying 70%. That’s to say nothing of gold, up 50%, or silver, up 60%.
Throw a dart at a board with all the world’s markets today and you’ll probably land on one in rally mode. Which is strange, because almost everywhere growth is either anaemic, or slowing quickly. So this isn’t about anticipated profits. In fact, outside a handful of tech giants which are making money hand over fist selling the hardware for the AI buildout, US profits have been flat this year. The same goes for investment: although the tech behemoths are pouring vast sums of money into what remains a speculative AI bet, overall corporate investment is down in the US this year. That would suggest expenses are rising just as sales are slowing — good news neither for the economy nor for share prices.
What, then, is behind these spectacular rallies? You can get a feel for what’s going on by looking at any of the star performers of the world economy this year, little stock markets such as Ghana or Kenya or Greece. While they may be small — you could probably fit the traders on the Accra and Nairobi stock exchanges into a large living room — such minnow stock markets aren’t for the faint of heart. Thinly capitalised and dominated by a small number of companies, they can swing wildly from low to high. An influx of new money is all it takes for share prices to surge.
“Throw a dart at a board with all the world’s markets today and you’ll probably land on one in rally mode.”
And that’s essentially the story of our time: major central banks and governments are pumping money into the world economy, and it’s bidding up virtually all asset prices. Over the last five years, US real GDP grew about 14%; in the same period, the US money supply grew by 40% — nearly three times the pace of the growth of the economy. That helps to explain the surge in inflation, which knocked nearly 24% off the purchasing power of the dollar. But it also explains the explosion in asset values: the S&P 500 stock market index rose some 85% over the last three years.
Add to this the massive fiscal stimulus in which the US government has been engaged since 2020, first with the pandemic rescue packages, then with the Biden administration’s industrial policy, and latterly with the Trump administration’s Big Beautiful Bill of tax cuts. Over the last five years, the US government has thereby pumped over $13 trillion of borrowed money into the economy. Yet the economy has expanded by roughly half that much in that time, which means a lot of the money is being parked in savings, or just leaving the economy.
And therein lies the basic problem. Most of the money is flowing into an increasingly small number of hands, limiting the boost from consumption the stimulus can give the economy. At one time, Western governments responded to economic downturns with Keynesian fiscal stimulus, putting money directly into workers’ hands through public works programmes or other employment-generating policies so as to boost consumption, which would then drag investment along. But ever since the neoliberal turn of the late-20th century, this strategy has been reversed: amid fiscal austerity, governments have left it largely to central banks to stimulate investment by injecting cheap money into the economy, the idea being that these investments would create jobs.
It hasn’t worked out that way, but that hasn’t stopped governments from repeatedly trying it. Prior to the Eighties, Western governments on average spent about 1% of GDP on fiscal stimulus during recessions; that figure rose steadily, and by the time of the 2008 crash it had reached 12% of GDP. Meanwhile, the flood of cheap money debases the currency: one way of looking at it is that expressed in gold, the US economy has not grown since 1990.
Of course, the US isn’t on the gold standard. Yet even when expressed in dollars, economic growth has been slowing for decades. Meanwhile, prices have kept rising, eroding the real value of wages while raising the share of total wealth held by the bulk of the population (since prices on assets have risen much faster than wages). In 1990, the wealthiest 1% owned 23% of the wealth while the richest 10% owned 60%; today, those figures are up to 31% and 67% respectively. Meanwhile, half the American population today own a mere 2.5% of their nation’s wealth.
In effect, the neoliberal model has become one in which a minority of the population continue to enjoy rising living standards through the redistribution of wealth from the bottom to the top. That explains why today in the US, 10% of the population accounts for nearly 50% of the economy’s consumption — a fragile base on which to build a recovery: should asset prices begin to wobble for any reason, the reverse wealth-effect could make them pull in their horns, tipping the economy into recession and thereby creating a self-perpetuating downward spiral in markets. Now, the internal contradictions of this strategy appear to be driving it closer to a crunch point. Workers feeling the squeeze have begun turning on immigrants, and nativist sentiment is rising across America.
Although their anger may be misplaced, the effect of immigration restriction will be to tighten labour markets. Since the beginning of ICE raids in the US, for instance, the labour force has stopped growing. That tightened supply will keep wages from falling as fast in downturns as they previously did and will cause them to rise faster in any upturn, either squeezing profit margins or raising inflation, or both. If interest rates rise as a result, given that margin debt is at a record high, the need to liquidate holdings to pay debts could produce a harsh turnaround.
This makes for a fragile US market. Aware of this, foreign investors appear to be keeping their money at home rather than rushing into America as they were before. That raises an interesting possibility. The rule amid past global market crashes has been that in a storm, the whole world heads to the safe port of US assets. However, the old rules may no longer apply. While on the way up, money being pumped into the American market appears to be fuelling booms across the world; on the way down, that money may not come back. America’s spending binge may end up leaving everyone else with the prize.