Following a brief decline after Trump's unprecedentedly hawkish Liberation Day tariffs, the US stock market was quick to recover and singularly defied expectations to post almost 30% growth amid overwhelming trade and geopolitical uncertainty. Then came the latest government shutdown, which many thought would be the catalyst for a long-awaited correction. But now, as the 43-day record-long shutdown looks to be close to an end, it seems even this has failed to bring the stock market back to reality. The US's flagship S&P 500 and Nasdaq 100 indices were close to all-time highs at $6,851 and $25,517, respectively, on 13 November. Lawmakers voted on 12 November on a bill that passed the Senate on Monday night to reopen the government, to the delight of President Trump, who hopes this will foster a reinvigoration of all US markets.
And yet the long-term direct and indirect impacts of this hiatus on the US economy are yet to be seen. This is especially the case as the Fed prepares its December monetary policy decision and US firms begin to deliver earnings reports, many of which are tipped to be lacklustre. The ongoing trade war with China, an ailing jobs market and risk posed by overvalued stocks in the AI and tech sector could all prove to be the straw that breaks the camel's back. However, the US stock market has defied all odds and then some this year. So, as we examine all these factors and more, the question remains: How long can US stocks remain irrational, and could they even avoid a correction altogether?
Back to work
Despite President Trump calling the measure "a very big victory" and S&P 500 and Nasdaq 100 futures rising by 0.4% and 0.6%, respectively, ahead of the vote last night, there's no doubt that the shutdown has already caused significant damage to the US economy. The Congressional Budget Office estimates that the six-week shutdown will slash Q4 growth by a full 1.5%, which will be particularly deleterious during the traditionally high-growth holiday season. Furthermore, the lack of any government data or statistics for the last month and a half means that the Federal Reserve has been unable to monitor inflation, the labour market and other key macroeconomic indicators. And what we have received has been far from positive, with the latest high-frequency data collected by ADP showing a contraction of the private-sector job market in late October. Considering the Fed's tentative wait-and-see approach, this will surely reduce the chances of another rate cut before the end of the year. Nonetheless, the CME's FedWatch tool still has the chances of a reduction to 350-375 basis points at over 50%, demonstrating optimism among market participants. If a rate cut does materialise, this will likely combine with the traditional Santa Claus rally effect to see US stocks reach a new crest before year's end.
At the very least, it's probably safe to say that the worst impact of the now-defunct shutdown has already been absorbed. After all, as the first rule of investing teaches us, the stock market is a "discounting mechanism" and typically leads market bottoms and tops. Therefore, the fact that the US indices aren't already showing a severe decline associated with the shutdown and its after-effects means that we're unlikely to see any such decline now.
A sign of the times
It's no secret that the US dollar has been weakening for some time, having now lost almost 20% against its key competitors in Europe since 2022. Global central banks, particularly those in the BRICs and Global South, are shunning the greenback in favour of gold, Bitcoin and even other fiat currencies like the yuan. In a recent interview, the chairman of Rockefeller Capital, Ruchir Sharma, said he sees the US's outperformance in global markets ending in 2025 as investors start "punishing" the US for its enlarged deficit. Meanwhile, in a June survey of global investors conducted by Bank of America, more than half reported that they expect international stocks to outperform the US over the next five years. China has shown a willingness to fight back in the trade war with its recent updates to its rare earths export controls, which could spell significant pain for a US market that is highly reliant on tech for its prosperity.
NVIDIA is now down 5% month over month after its revised expectations for the year ahead disappointed investors. Some analysts have even likened the current boom in AI-related stocks to the dot-com bubble of the early 2000s. Needless to say, a crash in this sector would have serious knock-on effects for the Nasdaq 100 and S&P 500, which are heavily weighted towards these companies and those dependent on their products. But it isn't just AI. Valuations across the entire US market are extremely elevated, with Goldman Sachs noting that net profit margins and return on equity in the S&P 500 are so high that meaningful EPS growth is unlikely. However, unlike in other boom-bust cycles, the difference now is the combination of relatively high inflation and low-yielding cash. To see wealth preserved, people need to own real parts of the actual economy, which could see the irrationally high valuations continue to edge higher.
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