The U.S. stock market bubble is back

The last few years have been far from golden, although looking at the performance of the S&P 500 and Nasdaq might give the impression that things have never been better. The reality is that there are still many issues in the world, including in the U.S. itself, but investors prefer to ignore them for now.

For starters, geopolitical crises remain unresolved. Despite some signs of progress between Russia and Ukraine, it is too early to talk about lasting peace, as the parties' demands remain far apart, and, for the moment, no one seems willing to compromise on their own interests.

The situation in the Middle East is not exactly better. Hamas may have agreed to a ceasefire with Israel that includes the release of hostages, but there is still no talk of an end to the conflict. Added to this is that the nuclear agreement with Iran remains in limbo, which could lead to another “preemptive strike”.

The picture for the economy, and specifically that of the United States, is mixed. On the one hand, U.S. GDP growth in the second quarter of 2025 increased at an annual rate of 3.0%, exceeding the average forecast of 2.3%. On the other hand, the labor market and inflation remain a concern.

For instance, U.S. employment growth in July was weaker than expected, while nonfarm payrolls for the previous two months were revised downward by a staggering 258,000. In addition, in July, 11% of small business owners said their biggest challenge was falling sales. 

Small businesses employ around 62 million people, representing 46% of the U.S. workforce. If they start to struggle, the economy as a whole will inevitably be affected. This explains why many banks now expect the Federal Reserve to cut rates three times before the end of the year.

The only drawback is that inflation remains above the Fed's 2% target. Producer prices in July rose 0.9% month-on-month and 3.3% year-on-year. Excluding energy and food, prices rose by 0.9% month-on-month and 3.7% year-on-year. This suggests that Trump's tariffs are increasingly impacting costs.

So when will the markets wake up?

Irrationality can persist, but the bull run appears to be losing steam. Without new optimistic headlines to fuel the momentum, it will be difficult for stocks to rise much further. Adding to the concern is the fact that excess liquidity is drying up, judging by the decline in overnight reverse repurchase agreements.