Why Stocks Surge Despite Fed Shrinkage

The S&P 500 has climbed 82% over three years while the Federal Reserve reduced its balance sheet by 27% through quantitative tightening (QT), defying traditional liquidity theories. Analysts attribute this rally not just to Fed actions, but to alternative liquidity sources, including significant fiscal deficits, strong corporate buybacks, foreign capital inflows, and bank reserves offsetting QT. Furthermore, markets are forward-looking, reacting to anticipated future policy rather than current balance sheet levels.

However, this headline performance obscures significant economic stress. Corporate bankruptcies are near 15-year highs, and consumer delinquencies are rising, particularly in areas like commercial real estate. These strains are largely hidden because the stock market gains are concentrated in a few mega-cap technology companies, weakening the link between index performance and broader economic health.

Adding to uncertainty, the Fed's reputation is under pressure, with critics calling it slow and reliant on outdated models. With markets anticipating a rate cut this week and speculation surrounding a potential leadership change—with Kevin Hassett, known for a dovish stance, possibly replacing Jerome Powell—policy guidance is becoming less predictable, raising inflation concerns.

(Source：BeInCrypto)