The historical high has been "trampled underfoot," and all assets are rising!

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With the strong boost of the Federal Reserve's interest rate cuts and the AI craze, the global financial market is experiencing its most widespread cross-asset surge since the speculative frenzy of 2021.

From stocks to credit, the prices of various risk assets are being pushed to historic highs, with market optimism leaving almost no gaps.

In the U.S. market, both the blue-chip S&P 500 index and the tech-heavy Nasdaq Composite Index hit record highs again this week, with gains of 14% and 17% respectively for the year. Following the Fed’s rate cut, the small-cap Russell 2000 Index also broke through its November 2024 high.

This boom has become globalized, with the MSCI All Country World Index, tracking both developed and emerging markets, also reaching record highs. Emerging market stocks have even outperformed the global stock index this year, a clear sign of investors’ sharply rising risk appetite.

The credit bond market is also displaying similar optimism. The credit spread, measuring the cost difference between high-rated U.S. corporate borrowing and Treasury bonds, has narrowed to below 0.8 percentage points, the lowest level since 1998.

Jamie Patton, co-head of global rates at asset management firm TCW, commented:

"You could say that the return you're getting for taking risk has never been so low."

This phenomenon has even spread to Europe, where borrowing costs for some French companies are now lower than those of their sovereign government, meaning investors no longer demand extra compensation for corporate credit risk.

Ben Inker, co-head of asset allocation at GMO, attributes this to a "fear of missing out" (FOMO), and believes that the extremely tight credit spread is the "most baffling" part of this round of rebound:

"I just don't understand how (investors) are unwilling to believe that the direction of the economy can actually be quite unstable."

Dual Narrative of AI Craze and Fed "Liquidity"

Wall Street has constructed a strong narrative for this seemingly fundamentals-defying rally—"The Great Resilience Trade."

Its logical pillars are: resilient consumers, the real advent of the artificial intelligence revolution, and a more dovish stance from the White House on tariffs.This narrative is rewarding both bold speculators and balanced portfolios alike.

Among them, the feverish bets on artificial intelligence are the core engine.

This craze has been described by investment firm GQG Partners as an "internet bubble on steroids," warning that investors seem to be making one-way bets while ignoring fundamentals such as high price-earnings ratios, slowing revenue growth, and the huge capital requirements of AI giants themselves.

However, bulls argue that unlike the internet bubble of the 1990s, today’s tech giants can use their free cash flow to support huge AI spending.

Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, believes:

"This trend has tremendous momentum, and when we see earnings accelerate next year, it will become extremely compelling."

If AI is a long-term belief, then the Fed’s policy shift is the most direct fuel.

This week’s rate cut was aimed at cushioning a weakening labor market, but the market interpreted it as the start of a new easing cycle, with the allure of lower capital costs completely overwhelming concern about the underlying causes of economic weakness.

After the rate cut announcement, global stock markets saw their largest single-week capital inflow since 2025. The futures market has even priced in at least four more rate cuts next year.

Matt Miskin, strategist at Manulife John Hancock Investments, summarized it:

"When economic growth is sufficiently strong and the Fed intends to cut rates, that’s the ideal scenario for equity markets."

Overlooked Risks and Defensive Moves by the Minority

Beneath the euphoria, some investors are seeing risks.

Kasper Elmgreen, Chief Investment Officer at Nordea Asset Management, warned that the market is simultaneously facing "extremely high geopolitical risks, a slowing U.S. labor market, inflation not fully under control, and extreme and historic market concentration." He emphasized that "current valuations leave little room for error."

Neel Kashkari, president of the Minneapolis Fed, also said publicly that risk markets appear "overly exuberant" even as the labor market slows, warning that "any fresh signs of economic weakness could puncture this prosperity."

Against this backdrop, a few teams have already begun defensively positioning.

Brij Khurana, portfolio manager at Wellington Management, clearly stated that market expectations for Fed rate cuts are too optimistic, credit markets have little value left, and his team’s positioning is "more defensive than at any time in recent periods."

Khurana is not the only skeptic. Beneath the surface of market prosperity, signs of caution are emerging: short interest in the iShares Russell 2000 ETF has climbed to nearly a two-year high, and so-called "safe haven" tools tied to gold and cash have seen four straight weeks of inflows.

Despite this, the bulls still seem to have the upper hand.

A popular view holds that the persistent skepticism in the market is itself the "unspent fuel" for the next stage of gains.

Raphael Thuin, head of capital markets strategy at Tikehau Capital, expressed a representative view:

"I would say people are buyers, but they are reluctant buyers. More rate cuts are coming, and the common consensus is: Don’t fight the Fed."

Risk Warning and DisclaimerThe market has risks, investment requires caution. This article does not constitute personal investment advice and does not take into account any individual user's specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular circumstances. Investing accordingly is at your own risk. ```