Jeremy Warner
It cannot be repeated often enough, but the sharemarket is not the economy. Nonetheless, the current disconnect between Wall Street and Main Street is something to be believed.
Judging by the performance of the S&P 500, you’d expect the US and wider world economies to be booming. It is true that they are not yet in recession, nor do most observers expect them to be in the immediate future.
Indeed, on some measures, the US economy is still flying. Recent GDP data suggest annualised growth of 2 per cent, sustained by the rocket fuel of escalating data centre capital spending. The jobs market also looks surprisingly resilient.
But beneath the surface, all is not as it should be. The closely watched University of Michigan’s Consumer Sentiment Index for the US plunged to a record low of 44.8 in May 2026, marking the third straight monthly decline on the back of much higher gasoline prices.
It’s a similar, if not quite as dramatic, story from The Conference Board, which finds consumer confidence to be almost as bad as it was at the height of the pandemic six years ago.
Pity Kevin Warsh, newly sworn in as chairman of the US Federal Reserve. He’s expected by Donald Trump to preside over a series of interest rate cuts in the run-up to November’s midterm congressional elections, but he is faced with an economy where inflation is rising strongly, and growth is sustained only by the candy floss of an AI spending boom.
Warsh is very much a believer in the power of AI to deliver a transformational leap in productivity and, therefore, a whole new era of strong, non-inflationary growth.
Maybe he’s right, but even if he is, it may still be some distance off. In the meantime, the AI spending mania is significantly inflationary in its own right.
Thanks largely to Trump’s war in the Gulf, most of the other immediate pressures are also highly inflationary. Ergo, he can only really disappoint his sponsor in the White House. Markets expect the Fed to raise rates in the months ahead, not cut them as Trump demands.
If peace talks bear fruit in the next week or two, and the Strait of Hormuz is reopened, then it may be possible for Warsh to look through the current spike in inflation, but even then, it’s going to take months for normal levels of supply to be restored.
Still relatively low oil prices in the face of current disruptions look to many observers as divorced from reality as the sharemarket.
Three weeks ago, I listed six reasons why the US sharemarket rally could keep going. Most of them remain valid, but they were at least in part based on the idea that the war with Iran had essentially already ended and that it was only a matter of time before some lasting resolution would be found.
Unfortunately, the cat-and-mouse game of international diplomacy has continued apace since then, with the blockade still in place. Last weekend was a classic of its kind; one moment, we were said to be on the verge of a settlement, and the next, after it was pointed out that the terms essentially amounted to a surrender by Trump in all but name, we were not.
However keen Trump might be to see Gulf exports resume, politically he cannot be seen to have lost, and therein lies the danger of a paralysing “Mexican standoff”. The worst outcome of all in Trump’s mind is the perception that he has gained nothing at all from his costly escapade.
In any case, it’s still impossible to know how events might pan out. Markets may be misjudging matters in assuming happy endings.
In the meantime, we have a number of classic top-of-the-market signals. The most obvious of these is the planned blockbuster listing of three of the US’s tech hopefuls – SpaceX, OpenAI and Anthropic.
All of them are burning capital like there is no tomorrow. All of them need new equity to sustain the blistering pace of investment, and many of their original investors are seeking at least a partial exit, having exceeded even their own inflated expectations for what these companies might be worth.
Other AI hopefuls will no doubt soon be jumping aboard the bandwagon, given current valuations. These defy all conventional yardsticks and are virtually without precedent.
The worst outcome of all in Trump’s mind is the perception that he has gained nothing at all from his costly escapade.
To the extent that there are past examples, they largely lie with the dotcom mania at the turn of the century. This did not end well.
Many of the same characteristics on display back then are evident in the current bubble. Fearful of missing out on the valuation madness, companies are rebranding themselves en masse as pioneers of the new technologies, however fanciful the claim.
As Robert Buckland, the former chief global equity strategist at Citigroup, has observed, the planned flood of new equity into the market follows a prolonged period of “de-equitisation”, in which the number of companies traded on the sharemarket has shrunk precipitously owing to takeovers, mergers, insolvencies and delistings.
This process is part of the reason the sharemarket has performed so strongly since the financial crisis. There’s been a diminishing pool of supply to meet growing demand for stock market investment.
The upcoming trio of blockbuster Initial Public Offerings (IPOs) begins to reverse that trend. There will be no shortage of equity supply in the months and years ahead. Sovereign bond market issuance from debt-saddled governments threatens to be equally abundant, putting further pressure on asset prices.
Various other metrics are also flashing red for danger. One is the sheer concentration of market value in a relatively small number of mega stocks. Just seven of them account for around 35 per cent of the entire value of the S&P 500, which – sorry for repeatedly using the word – is again unprecedented. The planned summer of IPOs will further add weight to this cluster of tech stocks.
Other standout oddities include the fact that shares now account for nearly half of total US household savings in financial assets, and a third of net worth more widely, both record highs. The total value of US sharemarkets relative to GDP – commonly known as the Buffett Indicator – is approximately 220 per cent. Historically, around 100 per cent would be considered normal.
If sharemarkets crash, the knock-on consequences for consumption through negative wealth effects are likely to be dramatic.
It’s a mug’s game predicting when bull markets are going to end. So far, share prices have casually brushed aside virtually every shock thrown at them – from pestilence to war and growing protectionism – and could easily carry on in the same vein for a long time to come.
But as Herbert Stein, president Richard Nixon’s economic adviser, observed: “If something cannot carry on forever, it will stop.” Hard to know when, though.
