The U.S. stock market has hit a plateau after a prolonged rally, with the S&P 500 trading sideways since hitting 7,500 last spring. Investors are growing weary of unfulfilled promises from AI hyperscalers, leading to stock price declines for companies spending heavily on data centers without proportional returns. Blackstone recently suggested that Anthropic could face a junk credit rating following its upcoming public offering, adding to market pessimism. News of Amazon’s and Intel’s aggressive AI spending plans further dampened investor sentiment, with the Nasdaq closing nearly 3% down on Friday after its biggest single-day drop since June 5.
Concerns are mounting that the investment bubble driving the economy may be reaching its limits. U.S. fiscal deficits have flooded the economy with cash, much of which has flowed into the stock market, while hyperscalers are issuing large volumes of bonds to fund their investments. This competition for lending is driving up interest rates, squeezing the bottom lines of governments and businesses. Optimists argue that the market will rally after Tuesday’s elections, potentially boosted by Anthropic’s public offering in November. However, others warn that Anthropic’s IPO could mirror SpaceX’s, drawing in capital but leaving the market in a sluggish state.
Geopolitical tensions are adding to market volatility, with speculation that the war on Iran could resume after the U.S. elections. Israeli Prime Minister Benjamin Netanyahu and former U.S. President Donald Trump have converging motives to restart the conflict, which could lead to higher oil prices and prolonged inflation. Oil traders expect prices to remain elevated well into next year, potentially benefiting Canada’s oil industry but also complicating Prime Minister Mark Carney’s plan to build a West Coast pipeline. Rising shipping costs to Asia and reduced demand for Canadian oil in Texas refineries could neutralize some of these benefits.
The U.S. economy faces additional risks from political instability, as Mr. Trump may contest the election results if the Democrats take both chambers of Congress. A weak stock market could cause asset-owners to reduce spending, potentially slowing the economy. Canada, while in a relatively resilient position, could still feel the impact of a U.S. downturn. With inflation remaining above target and central banks likely to keep raising interest rates, the outlook for the coming months is uncertain, suggesting a period of prudence for investors and consumers alike.