BTCUSD, gold (XAUUSD), and the S&P 500 index: assets are breaking records wherever you look. Yet, it’s hard to say that the economic backdrop really supports this rally. The fight against inflation, for example, is far from over, and the labor market is showing signs of weakness, raising the threat of stagflation.
Domestic politics offer little relief either. Due to continued gridlock between Democrats and Republicans, the U.S. entered another shutdown on October 1. And with House Speaker Mike Johnson saying he has no new deal to propose, there is little hope that the situation will be resolved anytime soon.
As for the AI-driven market euphoria, much of it appears to be pure speculation. Apart from chipmakers, most companies involved in AI are not yet benefiting from it, including big tech companies such as Meta, Amazon, Alphabet, and Microsoft, which are spending billions with little immediate return.
Morgan Stanley estimates that AI-related products generated around $45 billion in revenue last year, much less than the spending on development. And the gap is expected to continue to grow: according to Bain & Co., the rise of AI infrastructure could require $2 trillion in annual revenue by 2030 just to break even.
So what is driving the investor frenzy?
Beyond the fear of missing out, similar to what happened during the dot-com bubble, another factor seems to be emerging: growing concern about the future of the U.S. dollar. More specifically, investors may be shifting to riskier assets to hedge against movements in the DXY.
And there is no shortage of reasons for the latter to gain momentum. In addition to trade wars leading countries to seek alternatives to U.S. assets, including Treasury bonds and the dollar, the ever-increasing U.S. national debt, as well as Trump’s pressure on the Fed, weigh on the U.S. currency.
The dollar's weakness is also evident when looking at asset growth in other currencies. For example, in euros, the rise of BTC or gold seems much less impressive. And with the Federal Reserve just beginning its path of rate cuts, this could be just the beginning unless data forces the regulator to change its mind.
Is it too late to jump into the market?
Euphoria always ends; the only question is when. If you are looking for alternatives to the dollar, focus on quality assets such as gold rather than speculative trades. When the market turns, those chasing the bubble will suffer the most, and the correction may be much more painful than a simple healthy pullback.