With debt spiraling out of control, fears of stagflation, and rumors of bubbles, can the U.S. stock market continue to rise, or is a painful correction looming?
Looking at the rally in the Dow Jones, S&P 500, and Nasdaq, Warren Buffett's quote comes to mind: “Never bet against America.” Despite global uncertainty and numerous domestic problems, the U.S. stock market continues to rise as if on autopilot. Even so, some continue to insist that a correction is just around the corner.
And, to be fair, their arguments often seem reasonable.
Take, for example, the U.S. national debt, which continues to grow and has already surpassed $37 trillion. With the recent passage of the “big, beautiful law,” the outlook doesn't look very promising. As for the idea of eliminating more than 90% of the debt through cryptocurrencies, for now, that's unlikely to happen.
Another obstacle increasingly cited by bears is the risk of stagflation. Once again, the reasoning is not without merit: if the U.S. economy stagnates while prices continue to rise due to trade wars, companies could face rising costs just as consumer demand weakens. The result? A decline in operating margins.
Others also point to the “too far, too fast” factor. To put this in context, since its April lows, the S&P 500 has risen more than 35%, setting new records almost daily, something that rarely happens even in a healthy economy. It's a pace that understandably attracts attention, although several forces are at play here.
Beyond the obvious FOMO, the market is being fueled by the AI boom, thus technological development, massive corporate buybacks, and consistently solid earnings reports. Among S&P 500 companies that issued guidance for Q3, more than 22% expected to beat analyst forecasts — the highest share in a year.
On top of that, a shift in Fed policy has lifted investor sentiment. With labor market conditions softening, the central bank has toned down its rate outlook and is now forecasting to cut rates twice more before the year’s end. Of course, some suspect this shift was also influenced by pressure from the president…
So where does that leave us?
On the one hand, there are more than enough reasons for a correction: debt, stagflation, geopolitics, and overvalued valuations. Mark Spitznagel, from the Universa Investments hedge fund, even warns of a bubble in the S&P 500 index, which could inflate to 8,000 points before bursting violently, similar to the crash of 1929.
On the other hand, the market does not care about counterarguments. Goldman Sachs does not mince words: it has raised its target for the S&P 500 to 7,000 points in six months and 7,200 points in twelve months. One thing is clear: betting against the trend, even if you are ultimately right, may not be the best strategy.