A trader works on the floor at the New York Stock Exchange (NYSE), April 16.Jeenah Moon/Reuters
The world is a hot mess, but don’t tell the stock market.
The S&P 500 Index, the world’s most followed market benchmark, hit a record high this week against a backdrop of geopolitical tension, out-of-control technology and White House dysfunction.
Investors are not losing any sleep over conflicts in Ukraine and the Persian Gulf. Nor are they bothered by news that the latest batch of artificial intelligence models are too dangerous to be released to the public. As for Donald Trump’s increasingly erratic behaviour, that too is being accepted as just one of those things. Apparently, it’s the most natural thing in the world for the U.S. President to pick a fight with the Pope.
What lies behind Wall Street’s odd insouciance? Three things. The first is TACO – shorthand for Trump Always Chickens Out. The four-letter acronym was originally intended as a joke, but it has turned out to be a wonderfully accurate guide to the U.S. President’s behaviour during his second term. Time and time again, he has committed outrageous acts of provocation, from threatening to take over Greenland to imposing massive tariffs on former allies. However, he has always retreated if the markets falter or if his intended victims start to push back.
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Stock markets and futures markets are betting that Mr. Trump will pull his favourite trick yet again. He and Iran’s leaders seem eager to end to the Gulf debacle and chances are excellent that they will come to an agreement that will allow Mr. Trump to scuttle away from the dumpster fire he has ignited.
If disaster is averted in the Middle East, the market’s eyes will turn back to the state of the U.S. economy. Investors see a lot to like there for the simple reason that Washington is showering money on people.
In the long term, this fiscal madness has to stop. In the short term, though, the continued gusher of government cash is an undoubted positive. As strange as it sounds, this year’s massive budget shortfall amounts to a second reason for market optimism. Washington’s deficit is projected to come in at about 5.5 per cent of gross domestic product and all that money will help to goose Mr. Trump’s economy to maximum performance in the run-up to crucial midterm elections in November. Corporations stand to do particularly well in the months ahead. The cash flooding into the economy is helping to inflate corporate profits, creating yet another reason for the market’s recent complacency.
U.S. corporations are just starting to report first-quarter results and analysts surveyed by FactSet expect that earnings per share for the S&P 500 will rocket ahead by 13.2 per cent compared to a year ago. This is probably a conservative forecast. Actual earnings have typically exceeded FactSet estimates over the past decade, usually by several percentage points. If a similar trend holds true this time, the first quarter of 2026 could be the best quarter for earnings growth since 2022. This profit bonanza owes a lot to Mr. Trump’s deficits. It owes even more to AI euphoria.
The extraordinary potential of the new technology has created a gold rush mentality. Hot money is pouring into related sectors, fuelling investment in everything from computer chips to data centres, and swelling bottom lines.
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Add up the bumper profits, Washington’s free-spending ways and Mr. Trump’s knack for narrowly avoiding disaster and it becomes clear why the stock market is shrugging off potential threats. Say what you will about a world in turmoil, but the near-term prospects for the S&P 500 do look rather tempting. The catch is that the good times also seem rather fragile. The system is being pushed to its limits, with little margin for error.
The Gulf standoff still has the potential to go badly wrong. AI euphoria could sour if the new technology proves to be less profitable than investors currently anticipate.
Looking longer term, it’s difficult to see how the U.S. can deal with its deficit problem and get back to fiscal sanity without painful adjustments. Other stresses are also building. Consider, for instance, the growth of corporate profits. Measured as a percentage of the total U.S. economy, they stand at their highest level on record and they seem poised to surge even higher. Is this a good thing? Not necessarily. One reason the profit share of the economy has grown so big is because the portion of the economic pie that goes to employee compensation has plunged from the levels that were typical in the 1970s and 1980s. Investors, not workers, have been the prime beneficiaries of recent economic growth.
In what may be a not entirely unrelated development, measures of Main Street happiness in the U.S. are now flashing red. The University of Michigan’s venerable survey of consumer sentiment just hit the lowest level in its 74-year history. Think about that for a moment: Profits have never been better, people have never felt worse. This does not sound like a stable situation. Investors may want to ponder that as they contemplate today’s booming stock prices.