Shares have struck document highs this week whereas borrowing spreads for US corporations have shrunk to their tightest this century, as buyers warn markets are “priced for perfection” regardless of mounting dangers.
US equities have rebounded from their bruising commerce conflict sell-off earlier this 12 months in a run that has propelled tech giants Nvidia and Alphabet to multi trillion-dollar valuations, however is now sweeping up shares of all styles and sizes.
The blue-chip S&P 500 and tech-heavy Nasdaq Composite — up 13 per cent and 17 per cent respectively this 12 months — have set information. They had been joined by the small-cap Russell 2000 which topped its November 2024 peak after the Federal Reserve lower rates of interest on Wednesday.
The rally extends throughout dangerous asset lessons, with the extra borrowing prices that high-grade US corporations pay over US Treasuries dipping beneath 0.8 share factors, their tightest degree since 1998.
“It’s truthful to say that you simply’ve by no means been paid much less to take danger,” mentioned Jamie Patton, co-head of world charges at US asset supervisor TCW. “It’s not like that is particular to any explicit asset class. Each value appears to be indicating perfection.”
However she warned there was an “rising paradox” with rising geopolitical and commerce dangers, because the financial influence of Donald Trump’s commerce conflict turns into clear.
The rally shouldn’t be restricted to the US: the MSCI All Nation World index, which tracks shares throughout developed and rising economies, has hit an all-time excessive. Rising market shares, shunned by buyers in recent times, have outstripped the worldwide index in 2025, in an indication of buyers’ elevated risk-taking.
European and US credit score has rallied in lockstep. Borrowing prices for a number of French corporations have fallen beneath these of their authorities in current weeks, a uncommon transfer that in impact means buyers now not demand additional compensation for lending to the company sector.
Ben Inker, co-head of asset allocation at GMO, mentioned “worry of lacking out . . . does appear to be what’s going on, the idea that everyone ought to have the ability to get wealthy”.
Wafer-thin credit score spreads had been the “most mystifying” aspect of the rally, whereas the small-caps document excessive was placing given the weakening US economic system, he warned. “I simply don’t perceive how you would not suppose that the trail of financial outcomes is fairly unstable.”
In fairness markets, bets on the rise of synthetic intelligence have dominated buying and selling flooring and powered US markets to dizzying heights over the previous decade. However shares’ document valuations as a a number of of corporations’ gross sales, and the outsize contribution to the rally of just some tech corporations, have raised alarm bells.
“We’ve acquired actually, actually excessive geopolitical dangers, an financial scenario the place the [US] job market is slowing and inflation shouldn’t be totally below management, and excessive and historic market focus,” warned Kasper Elmgreen, chief funding officer for fastened earnings and equities at Nordea Asset Administration. “Valuations don’t go away numerous room for error.”
Funding agency GQG Companions this month described the inventory market as “dotcom on steroids” — a reference to the Nineteen Nineties web inventory increase and bust.
“Buyers [are] seemingly making a one-way wager on the AI mania, whereas showing to disregard alarming elementary points,” mentioned the GQG paper, pointing to lofty earnings multiples, slowing income progress and the rising funding wants of the large AI companies like chipmaker Nvidia.
The US inventory restoration has been supported by retail buyers and corporations themselves piling in to “purchase the dip”, a collection of tariff offers which have averted a worst-case state of affairs on commerce and, crucially, strong second-quarter earnings for tech giants. “Once you take a look at company profitability, issues look comparatively good,” mentioned Nordea’s Elmgreen.
Matt Eagan, portfolio supervisor at Loomis Sayles, mentioned that sky-high asset costs instructed buyers had been banking on “productiveness features of the type we have now by no means seen earlier than” from AI, of which there was not but important proof. “It’s the primary factor that might go mistaken.”
Pouring gasoline on the shares and credit score rally in current weeks have additionally been mounting expectations that the Fed will slash borrowing prices over the approaching 12 months to assist the world’s largest economic system, after dire jobs numbers instructed it was stalling. In line with Financial institution of America, world shares noticed their largest weekly influx of 2025 this week as buyers cheered the primary indicators of looser financial coverage.
Wednesday’s quarter-point fee lower from the Fed is anticipated to be adopted by not less than 4 extra by this time subsequent 12 months, in accordance with futures markets. That has sparked features in short-term US Treasuries, taking the two-year yield to as little as 3.5 per cent this month, near its lowest since 2022. Yields transfer inversely to costs.
“On the similar time that the labour market seems to be slowing, danger markets appear exuberant,” wrote Neel Kashkari, Minneapolis Fed president, in a Friday publish, including that “any signal of recent financial weak spot might pop [that] exuberance”.
Information visualisation by Ray Douglas
