ALL year, scores of Wall Street professionals have questioned the sustainability of a blind risk-on recovery that has boosted stock prices by billions of dollars, sent Bitcoin soaring, fueled a bonanza in terms of credit, and much more.

All year long, besides a short-lived market swing in the summer, they were completely wrong. Now, with the return of Donald Trump to the presidency and the increase in assets in his wake, a whole different anxiety has set in: investors are not optimistic enough.

This insecurity is fueling the latest stock, credit and crypto buying frenzy. More than $2 trillion was added to stocks over the five sessions, helped by a $20 billion inflow into funds on Wednesday alone. Small-cap companies surged almost 9 percent, banks also rallied and Bitcoin hit a new record high.

Behind the surge is almost total optimism that Trump’s growth promises – tax cuts and deregulation – will unlock a new round of gains in an already booming economy, just as the Federal Reserve is directs towards an easy money position.

Bonds have been the only source of skepticism this election cycle, with concerns that the price of fiscal stimulus will be high. Yet even Treasury yields showed signs of stabilization late in the week.

Wall Street is now scrambling to predict how far this boom of everything will go. As Bitcoin breaches US$75,000 for the first time, VanEck’s Matthew Sigel calls the bullish scenario “stronger than ever”, with US$180,000 possible next year and US$3 million by now 2050. Veteran analyst Mike Mayo said he sees a “paradigm shift.” » for American banks, one of the many bullish calls for financial stocks.

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Venerable strategist Ed Yardeni’s big worry is that his own optimism has been too restrained, predicting a veritable “roaring 2020s” ahead.

“I’m constantly being pushed around by the stock market,” said Yardeni, founder of Yardeni Research, one of the industry’s most loyal bulls. “I think we are in a bull market that will last until the end of the decade.”

Exuberance flooded every corner of Wall Street. The S&P 500 hit its 50th record high this year with a weekly gain of 4.7 percent. The VIX index, a measure of volatility known as the “fear gauge,” saw its biggest weekly decline since 2021.

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While momentum can breed momentum, moving so quickly also risks blinding investors to ongoing weaknesses in the economy and elsewhere. It wasn’t until September that concerns about the health of the U.S. labor market caused the S&P 500 to fall more than 4 percent in a week. The previous month, economic fears and unwinding hedge fund trading nearly caused a 10 percent correction in the index, sending the VIX to its highest peak in three decades.

“We could get ahead of ourselves on our skis in the long term,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “In the very short term yes, it is definitely a risk event. That said, I just think the lines are getting “bigger under a Trump presidency,” referring to the likelihood of risky outcomes given the billionaire businessman’s combative political posture.

Portraying the president-elect as possessing a unique touch to the market is also somewhat belied by history. Despite tweeting more than 100 times during his first term on market topics, the S&P 500’s performance during Trump’s first term has actually been a bit lower than that of Democrat Joe Biden, whose new president ridicules growth policy.

Risky business

Valuations, after two years in advance, are now among the most important problems. While Trump cited rising stock prices as an indicator of his first presidency, the bar is now higher. Earnings multiples stood at their highest level on record for an Election Day, which could make it more difficult to cut taxes to boost stocks again. Higher borrowing costs due to growing budget deficits could further suppress the positive impacts of its business-friendly policies.

Another risk is that the Fed moves away from the pace of rate cuts expected by the market. Companies including Barclays Plc and the Toronto-Dominion Bank have lowered their expectations for interest rate cuts for 2025 as immigration restrictions and rising tariffs under the Trump administration could boost interest rate cuts. ‘inflation.

Yet the latest Fed meeting did nothing to dampen positive sentiment in risk-off markets. Chairman Jerome Powell said the economy was strong and stopped short of saying whether the central bank would hold off on cutting rates following Thursday’s quarter-percentage-point cut.

Despite signs of slowing job growth, economic data remained resilient, with Citigroup’s U.S. Economic Surprise Index in positive territory.

“You can still have a bearish narrative if you look at the manufacturing PMIs, the yield curve, and then the unemployment trend, but the bullish narrative is much stronger,” said Sebastien Page, chief investment officer at T Rowe Price , at Bloomberg Television. .

“Unemployment is still low, the Fed is easing its measures, we have the budget pedal on full blast, we have a lot of good things.”

A gauge of so-called Risk Metrics compiled by Bloomberg, which covers exchange-traded funds that track small-caps, high-yield bonds and financial stocks, saw its biggest weekly inflow since 2016 – incidentally the year Trump won his first presidential victory. Retail trader participation in the options market reached record levels in the days leading up to the election, according to JPMorgan Chase & Co.

Amid Bitcoin’s rise, the largest ETF holding the coin notched its biggest single-day gain since its inception. Even Dogecoin, a cryptocurrency created as a joke in 2013 and which counts Elon Musk among its most ardent and vocal supporters, has reached a new high.

Small caps, which struggled to rebound all year, finally broke out. The group is expected to be one of the biggest beneficiaries of the Trump White House, given his protectionist rhetoric and plans to cut corporate taxes. The prospect of a favorable regulatory framework for the financial and energy sectors has also caused investors to rush to these sectors.

Investors have also accepted credit risk. With spreads on high-yield securities at their lowest level since 2007, they have sent the most liquidity to the largest junk bond ETF this year.

“There’s a lot of optimism in the market,” said Erin Browne, portfolio manager and head of asset allocation at PIMCO, which has started buying more domestic companies and selling some of its most popular companies. more exposed internationally. “There is a lot of optimism that regulations will be eased next year so that corporate tax rates do not increase. And we are in an environment characterized by continued strong corporate earnings growth and Fed cuts.” BLOOMBERG