Is the Feast of the U.S. Stock Market Coming to an End? U.S. Economists Warn: The Three Major Upward Drivers Are Losing Momentum

It seems like just yesterday that the U.S. stock market was soaring to new heights, fueled by an unprecedented combination of factors. However, as we approach the midpoint of 2024, some economists are starting to question whether the party is coming to an end. In this article, we'll explore the three major upward drivers of the U.S. stock market and examine the signs that suggest they may be losing momentum.

1. Earnings growth of big tech firms is unsustainable

One of the primary drivers of the U.S. stock market's outperformance has been the impressive earnings growth of its big tech firms. However, as Ruchir Sharma, chair of Rockefeller Capital Management LP's Rockefeller International, points out, this growth is not as exceptional as it seems. In a recent article, Sharma argues that the U.S. earnings growth would not look so exceptional if not for the supernormal profits of its big tech firms and massive government spending. He warns that these supernormal profits are likely to get competed away over time, leading to a slowdown in earnings growth for these companies.



2. Government spending is artificial and unsustainable

Another major driver of the U.S. stock market's performance has been the heavy deficit spending by the U.S. government. This spending has provided an artificial lift to the economy and corporate earnings, but it is not a sustainable source of growth. Sharma notes that it now takes nearly US$2 of new government debt to generate an additional US$1 of U.S. GDP growth, a 50% increase from just five years ago. This worrying trend suggests that the U.S. economy is becoming increasingly reliant on debt, which could lead to a slowdown in economic growth and corporate profits.



3. Investor confidence is waning

The final driver of the U.S. stock market's performance has been investor confidence. However, as the U.S. government's addiction to debt continues to grow, investors may start to lose confidence in the U.S. economy and its ability to repay its debts. Sharma warns that investors may eventually demand higher interest rates or a demonstration of fiscal discipline, which could lead to a reduction in government spending and undermine economic growth and corporate profits.

In conclusion, the three major upward drivers of the U.S. stock market (earnings growth of big tech firms, government spending, and investor confidence) appear to be losing momentum. As the U.S. government's debt continues to grow and the earnings growth of big tech firms becomes less sustainable, investors may start to question the long-term viability of the U.S. stock market's outperformance. While it's difficult to predict the exact timing of a potential slowdown, it's clear that the feast of the U.S. stock market may be coming to an end. Investors should be cautious and consider diversifying their portfolios to include other global markets that may offer better value and more sustainable growth.