US markets: The overlooked factor behind record Wall Street rally
With money supply growth fuelling a global market boom lifting everything from shares to gold, the ASX is back on the rise despite the latest political chaos in the US.
The AI boom and rate cuts are getting all the attention — they’re not the only things driving stocks.
JP Morgan’s global markets strategist Nikolaos Panigirtzoglou says the pace of US money creation remains just as powerful a force as it was in the past two years
This excess liquidity in the US system is working alongside the artificial intelligence boom and interest rate cuts to power up all manner of assets as well as US stocks.
“The strong US money creation has been a key factor in boosting US equities,” Panigirtzoglou says in his latest report. From May 2023 to the end of 2024, US money supply swelled by a staggering $US2.2 trillion — a 9.6 per cent jump that easily outpaced the nation’s economic growth. The pace of money creation hasn’t slowed this year.
The S&P 500 hit a fresh record highs on Wednesday despite the US government shutdown. Markets are often nervous in the early stages of US government shutdowns. But, the positive backdrop of the AI boom, US rate cuts and liquidity have been too powerful to derail.
Australia’s ASX 200 surged as much as 1.4 per cent to a four-week high of 8965.90.
The index looks well on the way to retesting its record high of 9054.50 set on August 25.
The scale of the AI boom was highlighted this week when Citi boosted its forecasts for AI capital expenditure.
The bank now predicts tech giants will pour $US490bn ($742bn) into AI infrastructure by 2026, up from its previous estimate of $US420bn.
Even more staggering, Citi raised its long-term forecast for AI-related spending by hyperscalers to surpass $US2.8 trillion through 2029, up from an earlier projection of $US2.3 trillion. The bank sees the four largest tech companies’ data centre spending growing at least 40 per cent in 2025 alone.
But, Panigirtzoglou warns the excess US liquidity is doing more than just lifting stocks. It’s also fuelling what he calls a “debasement trade” — where nervous investors pile into assets like gold and bitcoin as a hedge against weakening currencies and mounting government debt.
The debasement trade reflects a growing unease about the sustainability of massive money printing and government spending. When investors worry currencies are being debased — essentially losing value through excessive money creation — they flee to assets that can’t be printed at will.
Gold has been a standout, rising as much as 48 per cent to a record high of $US3895.38 per ounce as investors sought shelter from currency debasement fears.
The precious metal has attracted a record $US85bn in inflows this year, with analysts recently predicting prices could reach $US4000 per ounce by mid-2026.
Bitcoin is also riding the liquidity wave this year, rising as much as 33 per cent to a record high of $US125,000 as traders bet on continued dollar weakness.
“This occurred despite the Federal Reserve’s quantitative tightening measures,” Panigirtzoglou says.
US money creation has powered ahead even as the central bank drains cash from the system through its balance sheet reduction program to normalise monetary policy, other sources of money creation — including bank lending and deposit creation — have more than compensated.
US liquidity or M2 money supply growth — proxied as the sum of the stock of US commercial bank assets and the assets of US money supply funds — is currently tracking at an annualised pace the same as last year’s $US1.2 trillion.
“This strong pace of US money creation of the previous two years, faster than nominal GDP growth, appears to have continued this year,” Panigirtzoglou says.
“This liquidity is reverberating into financial assets and has likely been a factor in propagating US equities. With little sign of liquidity-inducing channels subsiding from the strong pace of the previous two years, a liquidity-driven propagation of US equities looks set to continue.”
But, while money supply growth outside the US is growing at a proportionally slower pace, “the expansion of liquidity is global and is not only confined to the US”.
“In turn, this implies that liquidity looks likely to continue to support financial assets, especially US equities, even as cash allocations overall look rather low,” he says.
“These low cash allocations don’t necessarily prevent liquidity creation from propagating financial assets further from here, but they rather pose a vulnerability to financial assets if a negative shock in the future induces economic agents to start rebuilding their low cash allocations as in March 2020 or during 2022.”
Meanwhile, Macquarie’s Australian equity strategist Matthew Brooks expects local companies to deliver more positive surprises than disappointments during the upcoming AGM season over the next two months.
After three years of decline, earnings trends turned more positive in September, marking a “rare month of net EPS upgrades”, according to Macquarie Brooks.
Conservative guidance from corporate Australia was a theme of the August reporting season and it may be too soon to expect widespread upgrades, but Brooks expects more positives than negatives amid an improving domestic economy, highlighted by the RBA this week.
He also thinks smaller companies could deliver the biggest AGM surprises.
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