The surge to new highs in the US stock market hides signals of a potential crash: The "Liquidity Rhapsody" orchestrated by the Federal Reserve and the Treasury is about to come to an end

According to the Zhitong Finance APP, a significant research report released on Thursday by the well-known market research institution GlobalData.TSLombard indicates that the massive excess liquidity released by the Federal Reserve and the U.S. Treasury has been the core driving force behind the "bull market upward curve" in the U.S. stock market and even the global stock market. Its impact surpasses traditional valuation metrics and has created a market that is excessively distorted by policy. The research institution has begun to question how long this liquidity support from the Federal Reserve and the Treasury can sustain the market's high valuation bubble.

As the institution released a research report outlining a cautious investment stance, Wall Street's concerns about the two core U.S. stock indices—the S&P 500 Index and the Nasdaq 100 Index—hitting historical highs recently, as well as the MSCI global stock index also reaching new highs, have been growing increasingly intense. There are particular worries about the historically high valuations and the potential for the overall performance of technology giants, which hold significant weight in the indices, to fail to meet market's optimistic expectations. Coupled with the resurgence of the tariff storm led by Trump, this could lead the S&P 500 Index and the Nasdaq 100 Index towards a "bear market downward trajectory."

The institution's analysis points out that quantitative easing (QE) has effectively turned the Federal Reserve into the "banker" for the Treasury, resulting in a surge in commercial bank deposits that far exceeds loan growth. These excess deposits, which have not been lent out or used to expand actual GDP, are flowing into and pushing up financial markets. This massive surplus of funds that have not been lent into the broader economy to expand GDP is undoubtedly one of the strongest driving engines continuously pushing up the stock market.

Steven Blitz, the Chief Economist for GlobalData.TSLombard, wrote in the research report: "The real 'wall of worry' that the stock market should overcome is how long the extreme high valuations of U.S. stocks can be maintained with the liquidity provided by the Federal Reserve/Treasury. In the very short term, we expect that the overall broad inflow of liquidity will be far lower than in the first half of the year."

The relationship between the stock market and liquidity—GlobalData.TSLombard

Blitz emphasized that the warning signals from high valuations are very clear. The economist pointed out that there is a significant gap between the S&P 500 Index (as a percentage of U.S. GDP) and actual corporate profits. The last two times such a large divergence occurred—during the mid-1960s and the internet bubble—resulted in annualized real returns for U.S. stocks over the subsequent ten years of -4% and -6%, respectively.

Additionally, the institution stated that stock market valuations are far ahead of productivity growth, and Blitz attributes this disconnection to the distortion effects brought about by liquidity rather than fundamental economic strength In the short term, GlobalData.TSLombard believes there are significant risks for risk assets in the third quarter. As the U.S. Treasury resumes its $600 billion bond issuance plan, draining liquidity, foreign capital inflows have sharply reduced following cracks in the "American exceptionalism," and the Federal Reserve continues to shrink its balance sheet by about $5 billion each month, the strong liquidity tailwind will turn into a headwind.

Blitz emphasized in its research report: "When the growth of liquidity in financial markets slows down comprehensively and macro data growth stagnates, the high-valuation stock market is prone to significant declines."

Looking beyond the current headwinds, a bigger question is whether the Federal Reserve (after the leadership change with Chairman Jerome Powell and others) will be forced to restart QE next year. Blitz believes that the new Federal Reserve leadership may have "no choice but to expand the balance sheet under multiple pressures to keep U.S. real interest rates at appropriate levels, which could stimulate capital expenditure growth and help support the stock market, but will also catalyze a larger stock market bubble."

The report concludes that the key bet facing investors is not whether the market is overvalued, but whether the Federal Reserve and the Treasury can successfully and continuously execute their long-standing, expanding capital market expansion plans.

As U.S. stocks hit new highs, Wall Street grows increasingly concerned about an impending market crash

J.P. Morgan's quantitative strategist Khuram Chaudhry's team warns that the global stock market—especially U.S. stocks—has shown signs of complacency, as the Federal Reserve maintains high interest rates and tightens liquidity through balance sheet reduction, while corporate earnings are being rapidly downgraded, yet major regional stock markets led by U.S. stocks continue to hit historical highs.

J.P. Morgan cites consensus data showing that global corporate earnings downgrades have significantly outpaced upgrades. "The current market environment seems filled with bullish sentiment, speculation, and rising complacency... either sell-side analysts are about to start a new round of upward revisions, or the market will face a period of increased volatility and downside risk."

J.P. Morgan analysts noted that in the past month, global corporate earnings were net downgraded by 14.3%, and in the past three months, net downgrades reached 18.7%. Although the current downgrades for U.S. stocks are relatively small due to strong performances in sectors like AI application software and semiconductors, the pace of earnings downgrades in regions like Asia and Europe has significantly accelerated. Given the uncertainty of Trump's tariff policies, the earnings outlook for the European market has remained weak, with a series of profit warnings emerging, particularly in the chemical and discretionary consumer sectors.

However, the stock market presents a starkly contrasting picture of prosperity: in the U.S., the Nasdaq 100 index has cumulatively risen 35% since its April low and has recently set multiple historical highs, highlighting investors' excessive optimism towards large technology companies. J.P. Morgan warns that in the second half of the year, the global stock market—especially the U.S. market—may face significant cracks.

Barry Bannister, Chief Equity Strategist at Stifel, who accurately predicted the U.S. stock market bull run from 2023 to 2024, warns investors not to be overly confident in the current rally, as U.S. stock valuations are near historical highs and the U.S. economy may slow significantly, making a substantial correction in U.S. stocks very likely Banister stated that the historical trend between core GDP and the return rate of the S&P 500 index indicates that the return rate of the S&P 500 index is likely to turn negative in the coming months.

The strategist expects that despite a significant rise in the U.S. stock market since the sharp decline in April, a sell-off may occur in the second half of 2025. Banister set the year-end target for the S&P 500 index at 5,500 points (the lowest target on Wall Street), which means the benchmark index will drop about 15% from its current level. Strategists from Evercore ISI also anticipate a potential 15% decline in U.S. stocks in the second half of the year