Wall Street, which has been "tearing up reports" all year, is now worried: not optimistic enough!
In the past five days, U.S. stocks have risen by more than $20 billion, the VIX index recorded its largest weekly decline since 2021, and Bitcoin reached new highs. However, U.S. stock valuations have climbed to historical highs, and market expectations regarding the Federal Reserve's monetary policy have also changed. Amid the bull market frenzy, undercurrents of crisis are stirring
Since the beginning of this year, doubts about the continuous rise of the market on Wall Street have been persistent. However, with Trump's return, various signs indicate that they may have been overly pessimistic.
In the past five days, U.S. stocks have risen by more than $20 billion, with a significant influx of funds into the market. Small-cap stocks and bank stocks have performed particularly well, and Bitcoin has also reached new highs.
Purely optimistic sentiment is sweeping Wall Street. Trump has promised to cut taxes and relax regulations to promote economic growth. This will inject new vitality into an already prosperous economy, much like the Federal Reserve's loose monetary policy.
Bonds are the only asset to decline in this round of growth, as concerns grow over the high cost of fiscal stimulus. However, even U.S. Treasury yields showed signs of retreat over the weekend, with the yield on the 10-year Treasury now at 4.305%.
However, U.S. stock valuations have climbed to historical highs, and market expectations for the Federal Reserve's monetary policy have changed. Amid the bull market euphoria, undercurrents of crisis are stirring.
Wall Street's Optimism Reaches a Peak
Trump's return will clear the gloom hanging over U.S. stocks, and the entire market is filled with an optimistic atmosphere.
This week, the S&P 500 index rose by 4.7%, marking the 50th new high of the year. The VIX index recorded its largest weekly decline since 2021.
Bitcoin prices have first surpassed $75,000, and Dogecoin has also reached new highs. Matthew Sigel from investment firm VanEck boldly predicts that the Bitcoin bull market is “stronger than ever”, with a potential rise to $180,000 next year and even reaching $3,000,000 by 2050.
Driven by the pursuit of higher returns, investors are still willing to take on greater risks by putting funds into junk bond ETFs, even as high-yield spreads hover at their narrowest levels since 2007.
Bloomberg's risk appetite indicator, which tracks small-cap stocks, high-yield bonds, and more, recorded the largest weekly inflow since 2016—coincidentally, the year Trump first won the presidential election. JP Morgan noted that retail traders' participation in the options market surged to record levels just days before the election.
Meanwhile, veteran analyst Mike Mayo is also optimistic about Bank of America's prospects, believing that the bank is undergoing a “paradigm shift.”
Wall Street's optimism is reaching a peak, with respected strategist Ed Yardeni even expressing concerns about being overly conservative. He believes that the future will be a fully prosperous “Roaring 2020s.” Yardeni stated:
“I have always felt overwhelmed by the stock market. I believe we are in a bull market that will last until the end of this century.”
Amid Bull Market Euphoria, Crisis Undercurrents Stir
However, the "crazy run" of the bull market may also cause investors to overlook the persistent weakness in the economy and other areas.
In September, the S&P 500 index fell sharply by more than 4% due to weak employment data. Last month, market panic intensified, with the S&P 500 index briefly retreating nearly 10%, and the VIX fear index soaring to a 30-year high.
"From a long-term perspective, we may have already peaked," said Amy Wu Silverman, head of derivatives strategy at Royal Bank of Canada Capital Markets:
"In the short term, this is definitely a risk event. I think the risks will be greater after Trump is elected president."
Bond fund giant Pacific Investment Management Company (PIMCO) issued a warning that Trump's policy plans upon his return could lead to increased inflation and economic overheating, hindering the Federal Reserve's interest rate cuts, which is a dangerous signal for the stock market.
In fact, during Trump's first term, the return of the S&P 500 index was slightly lower than the gains during Biden's administration, while the former always mocked the latter's economic policies.
After two years of strong growth, U.S. stock valuations have risen to historic highs, becoming one of the biggest risks facing the market. Although Trump once highlighted the stock market's rise as an achievement of his administration, the current high valuation environment makes it more difficult to stimulate the stock market.
Moreover, market expectations for the Federal Reserve's monetary policy have also changed, with several financial institutions lowering their expectations for interest rate cuts in 2025. The immigration restrictions and tariff policies implemented by the Trump administration could trigger inflationary pressures, forcing the Federal Reserve to adopt a more cautious monetary policy stance