Theme of the Day: Risky assets rally as stock markets hit record highs

Stocks have struck record highs last week while borrowing spreads for US companies have shrunk to their tightest this century, as investors warn markets are “priced for perfection” despite mounting risks. The blue-chip S&P 500 and tech-heavy Nasdaq Composite — up 14% and 17%, respectively, this year — set fresh record highs on Friday. The small-cap Russell 2000 also topped its November 2024 peak after the Fed cut interest rates on Wednesday. In equity markets, bets on the rise of artificial intelligence have dominated trading floors and powered US markets to dizzying heights over the past decade.The rally is not limited to the US: the MSCI All Country World index, which tracks stocks across developed and emerging economies, has hit an all-time high. Emerging market stocks, shunned by investors in recent years, have outstripped the global index in 2025, in a sign of investors increased risk-taking. According to Bank of America, global stocks saw their biggest weekly inflow of 2025 last week as investors cheered the first signs of looser monetary policy. Inflows to US stocks last week tallied $57.7bn, while investors moved nearly $5bn out of cash for the first weekly outflow since Jul, BofA said. Wednesday’s quarter-point rate cut from the Fed is expected to be followed by at least four more by this time next year, according to futures markets. “Fear of missing” out does seem to be what is going on, the assumption that everybody should be able to get rich. Investors are seemingly making a one-way bet on the AI mania, while appearing to ignore alarming fundamental issues, lofty earnings multiples, slowing revenue growth and the rising investment needs of the big AI firms like chipmaker Nvidia.The rally extends across risky asset classes, with the additional borrowing costs that high-grade US companies pay over US Treasuries dipping below 0.8 percentage points, their tightest level since 1998. It’s fair to say that you’ve never been paid less to take risk. It’s not like this is specific to any particular asset class. Every price seems to be indicating perfection, suggesting abundant liquidity is fuelling rallies.It's been a strong year in global markets, underpinned by lower borrowing costs and easier financial conditions. Stocks are rallying in the US and worldwide. Gold is at a record. Bitcoin is surging. Meanwhile, base metals remain resilient, with copper and tin leading the charge.LME copper has been toying with the $10,000 level again. There is a danger of copper failing here, as it did in Jul and Mar this year and in Jul and Sep/Oct last year. Previous failed sorties to this $10,000-$10,150 resistance area have been followed by steep reversals. The surplus has been hidden as so much metal has been tied up off-market either in transit or in unreported inventories due to the disrupted trade flows that tariff speculation brought about. Now that refined copper is confirmed to be exempt from tariffs, more of this unreported inventory will seep into the visible domain, which should weigh on prices as it reveals underlying oversupply.