Global Markets Soar 14% as Fed Cuts, AI Boom Drive Bull Run

In a global financial market driven by the Federal Reserve's policy shift and the AI investment narrative, a broad-based bull market is unfolding across various asset classes, including stocks and credit bonds. This surge is the most extensive since 2021, with major global stock indices hitting new highs and U.S. credit spreads narrowing to their lowest levels since 1998. The market appears to be pricing in a near-perfect scenario.

The Federal Reserve's rate cuts and the AI boom have propelled global financial markets to experience a broad-based rally across various asset classes. Stocks and credit bonds are being pushed to new historical highs, with market optimism pervasive. In the U.S., the S&P 500 and Nasdaq Composite indices have both hit new all-time highs, with year-to-date gains of 14% and 17%, respectively. The Russell 2000, dominated by small-cap stocks, has also surpassed its November 2024 high.

This rally has gone global, with the MSCI World Index, which tracks developed and emerging markets, also reaching new highs. Emerging market stocks have outperformed global indices this year, signaling a significant increase in investor risk appetite. The credit bond market is also experiencing a bullish trend, with the spread between high-grade corporate borrowing costs and U.S. Treasuries narrowing to below 0.8 percentage points, the lowest level since 1998. This phenomenon has even spread to Europe, where some French companies' borrowing costs are lower than those of their sovereign governments, indicating that investors no longer demand additional compensation for corporate credit risk.

This trend is driven by a narrative known as the "Great Resilience Trade," which posits that resilient consumers, a genuine AI revolution, and a more conciliatory stance from the White House on tariffs are supporting this rally. The core of this narrative is the fervent investment in AI, described by some as a "steroid-infused internet bubble." However, bulls argue that unlike the dot-com bubble of the 1990s, today's tech giants can support massive AI expenditures with their free cash flow.

Despite the optimism, some investors are wary of the risks. Concerns include high geopolitical risks, a slowing U.S. job market, uncontrolled inflation, and extreme market concentration. Some teams have begun defensive positioning, with Wellington Management's portfolio manager noting that the market's expectations for Fed rate cuts are overly optimistic and that the credit market offers little value. Defensive indicators, such as rising short positions in the iShares Russell 2000 ETF and inflows into gold and cash, suggest caution beneath the surface. However, the prevailing view is that the lingering skepticism in the market is fuel for the next leg of the rally, with many investors reluctant to bet against the Fed's easing cycle.