The U.S. stock market faces multiple risks: rising debt levels and financial stress dampen optimism.

Taiwan • Business • 05/21 06:18
The U.S. stock market faces multiple risks: rising debt levels and financial stress dampen optimism.

The S&P 500 Index is approaching a technical bull run, but market optimism is hiding several risks, including rising corporate and government debt, a weakening U.S. dollar, and pressures facing the banking and life insurance industries. After Moody's downgraded the U.S. credit rating, the 20-year Treasury bond yield is approaching 5%, challenging the stability of U.S. stocks. This article analyzes these sources of risk, uncovering hidden crises.

Key Updates

05/22 02:50

May 22, 2025 U.S. Stock Futures Market: Dow slightly declined, S&P and Nasdaq rose slightly

On May 22, 2025, at 08:35 Taipei time, the U.S. stock futures market showed a mixed performance. Dow Jones Industrial Average futures dropped 17 points to 41,930, down 0.04%; S&P 500 futures increased by 2.25 points to 5,863.5, up 0.04%; Nasdaq 100 futures edged up 2 points to 21,158.75, up 0.01%. The previous trading day saw major U.S. stock indices generally closing lower, and the slight fluctuations in the futures market reflect investors' cautious stance on the market outlook.

05/22 01:47

U.S. stock index futures remain stable as concerns over the deficit trigger a sell-off, the market is in a wait-and-see mode, and CNBC says the so-called "Trump put" is unlikely to happen.

U.S. stock index futures remained stable in early trading on Thursday as the market absorbed the previous day's sell-off triggered by worries about the federal deficit. On Wednesday, the Dow Jones Industrial Average fell more than 800 points, while the S&P 500 and Nasdaq dropped 1.61% and 1.41%, respectively, due to the surge in U.S. Treasury yields. Investors are concerned that the tax and spending bills being reviewed by Congress could worsen the fiscal situation. CNBC pointed out that the deficit issue is hard to solve through administrative measures, and a "Trump backstop" scenario is unimaginable.

05/21 22:18

At the Berkshire Hathaway shareholders meeting, Buffett emphasized that investment opportunities in the stock market are superior to those in real estate, backed by 40 years of data.

At the Berkshire Hathaway annual shareholders meeting in early May 2025, 94-year-old Warren Buffett emphasized that investment opportunities in the U.S. stock market are far greater than in real estate. He cited data from the past 40 years showing that returns from the S&P 500 index have significantly outperformed those of the housing price index, and he emphasized the ease and efficiency of stock trading. Buffett's perspective responded to current market concerns about the sluggish housing market and stock market volatility, and he expressed his confidence in the long-term growth of the U.S. economy.

05/21 18:19

The US lifts AI chip export restrictions, leading to a rise in US stocks, while the tax cut bill leads to a sell-off in US bonds and a weaker dollar.

In mid-May, the U.S. Department of Commerce lifted export restrictions on Chinese AI chips, which boosted U.S. tech stocks and led to impressive performances by related funds. The Congressional tax cut bill has raised concerns about the fiscal deficit, resulting in a sell-off of U.S. Treasuries, pushing the 30-year yield above 5%, and a weaker dollar index. European stock markets, influenced by U.S. policies, experienced mixed gains and losses.

05/21 14:50

During the U.S. stock market rebound, hedge funds' short selling reaches a ten-year high, while retail investors break records by buying the dip in a contrarian move.

During the recent rebound in the US stock market, hedge funds have been aggressively shorting, with the COT report indicating cumulative short positions amounting to $25 billion, hitting a ten-year high. Meanwhile, retail investors, unfazed by market uncertainty, continue buying the dips, with single-day net purchases reaching a new all-time high. This highlights a significant split in market sentiment, with institutions remaining skeptical of the rebound while retail investors view it as a buying opportunity.

05/21 06:18

The U.S. stock market faces multiple risks: rising debt levels and financial stress dampen optimism.

The S&P 500 Index is approaching a technical bull run, but market optimism is hiding several risks, including rising corporate and government debt, a weakening U.S. dollar, and pressures facing the banking and life insurance industries. After Moody's downgraded the U.S. credit rating, the 20-year Treasury bond yield is approaching 5%, challenging the stability of U.S. stocks. This article analyzes these sources of risk, uncovering hidden crises.

05/20 13:47

Jim Cramer, a CNBC personality, comments on the 10 biggest stock market events of May 20, 2025, and five key things investors should know before Tuesday's market opens.

On May 20, 2025, investors are faced with corporate earnings reports, policy reviews, and market dynamics. CNBC host Jim Cramer outlined the top ten stock market events, including Home Depot's earnings report boosting its stock price, AMD's sale of its server business, and MongoDB's downgrade. Meanwhile, the top five market headlines before Tuesday's opening highlight macroeconomic and corporate developments, such as comments from Federal Reserve officials, rising mortgage rates, and retailers' strategies regarding tariffs. These events impact market sentiment and investment strategies.

05/20 10:51

Moody's downgrade leads to a drop in U.S. stock futures: Dow Jones at 34,800 points, S&P 500 at 4,960 points, Nasdaq 100 at 21,440 points

On May 20, 2025, Moody's downgraded the U.S. sovereign credit rating from Aaa to Aa1, leading to a drop in the futures of the three major U.S. stock indices. Dow Jones Industrial Average futures stood at 42,800 points, S&P 500 futures were approximately 5,960 points, and Nasdaq 100 futures were approximately 21,440 points. Concerns over the U.S. fiscal deficit and debt sustainability have intensified, putting pressure on the stock, bond, and foreign exchange markets simultaneously. Despite the recent strong performance of the S&P 500 spot index, the weakness in the futures market reflects investors' cautious outlook on future trends.

05/20 04:48

Retail investors pour into Tesla, Palantir, and Bitcoin ETF: Record buying helps stabilize the US stock market, mitigating the effects of Moody's downgrade.

After Moody's downgraded the U.S. sovereign credit rating, retail investors sparked a record-breaking buying spree on May 19, with a net purchase of $4.1 billion in U.S. stocks, reaching a new all-time high. Tesla, Palantir, and Bitcoin ETF were the primary targets for capital inflow. Despite the S&P 500 index dropping more than 1% in early trading, it recovered due to retail buying, closing up 0.09%. Wall Street analysts recommend that investors see market pullbacks as opportunities to increase their positions.

05/19 22:49

Moody's Downgrades U.S. Credit Rating, U.S. Stocks Rebound Despite the Downgrade: Dow Jones Gains 137 Points, Philadelphia Semiconductor Index Declines

On May 16, Moody's downgraded the U.S. sovereign credit rating from "Aaa" to "Aa1," causing initial market volatility. However, on May 19, the three major U.S. stock indices closed higher despite the trend. The Dow Jones Industrial Average rose by 137.33 points, the S&P 500 inched up 0.09%, the Nasdaq ticked up 0.02%, while the Philadelphia Semiconductor Index fell by 0.50%. Investor sentiment steadied as retail buying supported the market, showing confidence in U.S. assets. In the bond market, the yield on the U.S. 10-year Treasury rose to 4.55%, and safe-haven assets like gold rose 1.54%.

Market Complacency Spreads

JPMorgan CEO Jamie Dimon pointed out that the market's 10% drop and rebound in a short period indicate "unusual complacency." He warned that investors' disregard for potential risks is concerning. BTIG technical analyst Jonathan Krinsky also observed that the current put-call ratio in the market is extreme, reflecting a lack of investor vigilance towards risks.

deVere Group CEO Nigel Green further noted that the market is turning a blind eye to risks such as inflation, geopolitical issues, and credit markets, and this "denial of reality" atmosphere may be masking impending problems.

Rising Government and Corporate Debt Pressure

The total U.S. national debt has surpassed $36.2 trillion, and according to the Peter G. Peterson Foundation, it is projected to increase by another $22 trillion over the next decade. On May 16, Moody's downgraded the U.S. sovereign credit rating from AAA to Aa1, citing ongoing debt and deficit expansion and the debt repayment pressure in a high-interest-rate environment.

The Republican-led tax cut bill has also raised concerns about fiscal sustainability. The nonpartisan Committee for a Responsible Federal Budget estimates that the bill could increase the annual deficit by over $1 trillion by 2034.

Weakening Dollar Reduces Asset Appeal

The dollar index has fallen more than 7% since the beginning of the year, currently at 99.80, falling below recent support levels. Although traditionally tariff policies might boost the dollar, this time the market views them as a source of global economic uncertainty, leading to a weaker dollar.

Morgan Stanley Chief Investment Officer Lisa Shalett pointed out that the simultaneous rise of the dollar and oil prices indicates the dollar may be entering a long-term weak phase, which could lead to international capital withdrawing from U.S. stocks, further depressing valuations.

High Interest Rates and Tariffs Pose Dual Threats to Banking Sector

As of the end of 2023, the total unrealized securities losses in the U.S. banking sector reached $482.4 billion, a 32.5% increase from the previous quarter. These losses mainly stem from the market value decline of long-term fixed-rate assets as interest rates rise. If yields continue to climb to 5%, losses could expand to $600 to $700 billion.

Small and regional banks are the first to bear the brunt. According to the U.S. Treasury's Office of Financial Research, these banks hold nearly half of the unrealized loss assets. The 2023 collapses of Silicon Valley Bank and First Republic Bank remain fresh in memory, demonstrating that when depositor confidence is shaken, these losses can quickly turn into a liquidity crisis.

Additionally, the high tariff policies of the Trump administration have exacerbated the pressure on the banking sector. The "stagflation" environment of high inflation and low growth poses challenges to small banks still holding large amounts of fixed-income assets.

Overseas Liability Transfers in Life Insurance Industry Raise Regulatory Concerns

The U.S. life insurance industry has transferred over $1.1 trillion in liabilities to offshore reinsurance companies in Bermuda, the Cayman Islands, and other jurisdictions. S&P noted that while these transactions aid in capital management, they also shift risks to jurisdictions with looser regulations.

The collapse of 777 Re underscores these risks. The company took on significant asset exposure related to private equity funds, ultimately leading to the restructuring of several U.S. insurance companies. Regulators are concerned about whether these reinsurance companies have sufficient assets to fulfill commitments to policyholders and warn that this move could impact pension security and overall financial stability.

20-Year Treasury Yield Nears 5% After Moody's Downgrade

Following Moody's downgrade of the U.S. credit rating, long-term Treasury yields rose rapidly. On May 20, the 20-year Treasury yield reached 4.99%, and the 30-year yield briefly surpassed 5%, hitting a new high since November 2022. This reflects growing market concerns about the U.S. fiscal situation.

On May 21, the U.S. Treasury conducted a $16 billion auction of 20-year Treasuries, the first long-term bond issuance since the downgrade. The market closely watched the auction results as an indicator of long-term bond demand and investor confidence.

According to a JPMorgan client survey, market expectations for rising yields have reached their highest level since February. CME data indicates that some investors are wagering that the 10-year yield will rise to 5%, with a risk premium of $11 million on that position.

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People Also Ask...

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The U.S. stock market seems so optimistic right now, but what are the real risks?

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