The many obvious negatives in markets are just not sticking. That means it’s probably time to brace for a melt-up in the final months of this year.

From the U.S. to France to seemingly now Japan, fund managers are increasingly alarmed about everything from debt sustainability to irrational exuberance in risky markets. Yet the script remains the same as it has been since April’s

U.S. tariffs

shock: buoyant stocks, red-hot corporate bonds and waves of money splashing in to private markets, all underpinned by a strong belief in the disinflation fairy to keep pulling

U.S. interest rates

lower.

Increasingly, the mood is that if you can’t beat ’em, join ’em, with even cautious investors hopping along for the ride.

“Clients ask, are things bubbly?” says Mike Riddell, a portfolio manager at Fidelity International in London. “Yes, things look frothy but maybe we have got another two years of this…It’s really hard to answer when the craziness will stop.”

It is not hard, however, to identify the risks, and nobody would be surprised to see them crystallize from one of three key areas. Possibly the most obvious is the

artificial intelligence

hype cycle. Corporate spending on AI is holding up a lot of sky right now — in public as well as private markets — and also accounts for an uncomfortably large slice of U.S. economic growth. Without it, some argue, the country might already be in recession. Investors are now openly asking whether this constitutes a bubble.

Amazon.com Inc.

‘s Jeff Bezos has even argued, with a straight face, that it does, but a

“good” kind of bubble.

He would do well to remember that they all burst in the end.

The second is the unbearable tightness of credit spreads. Just as stocks are pushing higher — the U.S.’s

S&P 500 Index

is up by 15 per cent so far this year and nearly 40 per cent since the depths of April — the extra pick-up that investors are accustomed to receiving for buying corporate rather than government bonds has all but vanished. A “surge” in investor bullishness over this asset class has emerged in recent months, in Bank of America’s words, which means “correction risks are rising.” There really is no room for error, which makes recent failures related to private debt markets all the more troubling. Nobody would be surprised to see a pullback here.

The big one, though, is the persistent degradation of U.S. institutions and political norms. The U.S. is far too rich and central to global finance to be considered an emerging market, but it certainly acts like one, and the full MAGA takeover of the

U.S. Federal Reserve

is not even complete.

Right now, markets are giving the U.S. the benefit of the doubt — a combination of the country’s exorbitant privilege deriving from its dominant reserve currency status and the assessment that the jobs market is wobbling and maybe the Fed needs to cut rates anyway.

That is fine to a point, but the big risk is resurgent inflation, which is already showing up in U.S. consumer prices. Anything that prevents the central bank from delivering rate cuts would stop this exuberance in its tracks, forcing bond prices lower and borrowing costs higher. The punchline here is that the U.S. government shutdown has blacked out official data on the economy, so we are largely flying blind.

On the margins, money managers are also keeping a keen eye on U.K. government bonds in the run-up to the country’s Budget next month and even on Japanese government bonds, which have already fallen hard this year, on concerns that the new prime minister in waiting, Sanae Takaichi, might deter the Bank of Japan from its anticipated interest rate rises. Those markets lack the heft of U.S. Treasuries but could easily prove to be the trigger for a proper rethink on whether bonds really pay investors enough compensation for the risk.

  • Jeff Bezos hails AI boom as ‘good’ kind of bubble
  • America is now one big bet on AI

For now, though, all of this and more remains catnip for miserabilists while more optimistic investors are in party mode. “FOMO is in full swing,” wrote Emmanuel Cau and colleagues from Barclays in a recent note to clients. Retail investors are still filling their boots with U.S. stocks, money is rushing in to mutual funds at the fastest pace since the peak of the American exceptionalism trade in November last year and still various types of hedge funds have been missing out on all the fun, leaving another large buyer base yet to catch the “fear of missing out” bug.

We are running on the dying fumes of a stale market cycle, according to the doubters. Maybe so. But it’s incredible how far those fumes can get you.

© 2025 The Financial Times Ltd