Markets are surging today, with the indices and virtually every speculative asset moving higher. A key driver behind this rally appears to be the so-called “Big Ugly Bill” from Trump, which is reportedly close to being passed. While this bill would trigger a significant increase in U.S. government debt, it would also inject substantial liquidity into the markets.
However, much of this liquidity is flowing into highly speculative assets—what some might call “junk”—such as cryptocurrencies and small-cap stocks, fueling sharp price gains. This dynamic is inflationary and ultimately erodes the purchasing power of the middle class, which could have quite negative economic consequences over the medium to long term.
Moreover, we are approaching debt levels where even the United States could face challenges servicing its obligations. The risk of a debt crisis—akin to what Greece experienced—can no longer be entirely dismissed.
Historically, it’s typical that towards the end of a bull market, the “junk” rallies the hardest, right before the inevitable downturn begins.
We just witnessed another choppy trading session marked by a pronounced rotation out of big tech and into defensive sectors such as healthcare, consumer staples, utilities, basic materials, energy, and the broader old economy. This comes after the market had been propelled higher by a handful of heavyweight stocks, while the majority of U.S. equities failed to reach new highs. Recently, however, the rotation appears to be favoring small caps, particularly those in the Russell 2000 and the Dow.
Once again, almost miraculously, a strong bullish breakout occurred overnight, right after the opening of the major Asian stock exchanges in Tokyo and Shanghai. The market remains challenging to interpret, as the S&P Indicator continues to stay in positive territory, albeit declining in value. Consequently, last night’s breakout came as a surprise and carries a significant likelihood of being sold into once the regular U.S. trading session begins.
Nonetheless, given the current market resilience and the ongoing rotation, new all-time highs in the S&P 500 remain possible. However, it appears the bull run may be entering its final phase—typically signaled when lagging sectors start to outperform. Caution is warranted, as a potential reversal could materialize in the next two to three weeks.