Fragile
US stocks closed sharply lower on Monday after President Trump escalated his criticism of Fed Chair Jerome Powell, stoking fears over the central bank’s independence and rattling investor confidence.
The sell-off was swift and broad, with the S&P 500 and Nasdaq falling 2.4% and 2.5%, respectively.
All 11 sectors ended in the red, with technology, consumer discretionary, and energy stocks hit hardest.
In a Truth Social post, Trump called Powell “Mr. Too Late, a major loser” and demanded immediate rate cuts, just days after suggesting his team could explore removing Powell from his position.
Last month, we hosted a call for clients on the ongoing asset allocation shift and the question below was put to me. My thoughts, looking at the broader market through a fragility lens, are shared below.
The U.S. market has come to represent nearly 70% of global market capitalisation, despite the U.S. economy accounting for only ~24% of global GDP. This imbalance is amplified by record-breaking concentration: over 33% of U.S. equity value is now housed in just the 20 largest firms—a degree of dependence that has no historical precedent.
What if we have long known the structure was fragile and that it is now cracking?
Let’s assume the market is propped up by layers of leverage, fiscal deficits, speculative AI tech euphoria, and massive defence spending.
If we take the above at face value, Trump’s return and his tariff escalation are not historical aberrations. They are symptoms of a long unaddressed social and economic decay. The last two decades have seen exploding inequality growth, real wage stagnation, and the erosion of the middle class—the backbone of functional democracies. Much like the French Revolution—where poorly managed famines following successive crop failures ignited long-simmering social tensions—the rise of today’s populist movements is a direct consequence of persistent mismanagement and failure to address deepening inequality. The refusal of our institutions to confront this hard truth is itself a symptom of the deeper malaise—and one that only serves to worsen the condition.
The tariffs mark a regime shift—not just in trade, but in the global financial order. Trump’s moves may seem aggressive or transactional, but even if they are rolled back partially, the radical uncertainty that they reveal on many other dimensions will persist. This uncertainty, coupled with geopolitical fragmentation and the weakness of European fundamentals, is here to stay.
Blue: SPX. Pink: Trend Exhaustion Indicator - confirming the end of the growth regime at the end of December 2024 (spikes to the upside). Following increased volatility and plateau as precursors of the regime shift revealed by the tariff measures.
Financial markets are ultimately mean-reverting over the long term, but the reversion is not what is taught in textbooks and at Universities. Instead, long periods of excess often end in abrupt corrections—more like sudden ruptures, where the prevailing consensus is swiftly and violently overturned: abrupt nonlinear mean-reversion (eg: Tulip Mania). The illusion of indefinite gains has been reinforced by short recovery times and central bank interventions. We could very well be in the early stages of a nonlinear amplified feedback and disorderly correction—and according to our long-term trend monitor, it will not be short-lived.
Implications Across Asset Classes and Regions
1. U.S. Equities
Expect high volatility, deeper corrections, and a breakdown of the AI-tech-shale-military bubble that has dominated capital flows. Mega-cap concentration will unwind painfully. Value stocks may perform better, but broad indices like the S&P 500 are likely to struggle for years.
2. European Markets
Europe enters this period structurally weak: politically fragmented, economically stagnant, and vulnerable to both energy shocks and military escalation. Tariffs from the U.S. further undermine its export-based recovery narrative. Expect underperformance, rising political risk, and more capital flight.
3. Emerging Markets (EM)
EMs dependent on U.S. and China trade (e.g., Vietnam, Thailand, Indonesia) are particularly exposed. Currencies may come under pressure, and capital flows will reverse. However, some resource-rich nations or those less entangled in U.S.-China tensions may offer pockets of resilience. Countries closely tied to China stand to benefit from its accelerated pivot toward expanding exports to emerging markets and deepening engagement through Belt and Road initiatives.
4. China
While China continues to face structural challenges—such as a slowing economy, demographic pressures, and a troubled real estate sector—it has, since 2018, been actively decoupling from the U.S. and reorienting its economic strategy. Anticipating rising trade barriers, China has increasingly focused on strengthening ties with emerging markets, expanding its Belt and Road initiatives, and accelerating the development of its domestic consumer base. A central pillar of this shift is technological self-reliance, with recent breakthroughs such as DeepSeek highlighting China’s progress in advanced IT and AI. Rather than being caught off guard by the latest wave of U.S. tariffs, China is already positioned to mitigate their impact—though regional volatility may still rise as strategic competition deepens.
5. Fixed Income
Yields will remain volatile. While risk-off sentiment would typically push rates lower, ballooning U.S. deficits and further potential fiscal easing could lead to bond market stress as inflation growth resumes. Inflation-linked bonds and selective credit opportunities may offer protection.
6. Commodities and Energy
Geopolitical friction and trade fragmentation could drive commodity bifurcation: prices for strategic materials may surge, especially if military tensions escalate. Precious metals and gold are likely to continue their ascent as safe-haven tangible assets.
7. Currencies
The longer-term outlook of the US dollar is increasingly fragile. Deep structural imbalances—soaring fiscal and trade deficits, rising political instability, and the erosion of institutional trust—are undermining confidence in the dollar’s role as the world’s anchor currency. As uncertainty grows, global capital is beginning to look beyond the U.S. for more stable and promising opportunities, signalling a gradual but meaningful shift away from dollar dominance. Expect growing interest in alternative reserve assets—gold, the Yuan and the Yen.
8. Alternative Assets
Bitcoin and other digital assets may once again gain attention as potential hedges against fiscal and monetary instability. However, they remain highly volatile, politically contentious, and deeply correlated with U.S. tech markets—often behaving more like a leveraged version of the Nasdaq than a true diversification asset. Their appeal may be further amplified by large funds and financial institutions in search of the next speculative opportunity, potentially echoing the dynamic that fuelled the CDO-driven, casino-like behaviour preceding the 2008 financial crisis.
A Historic Turning Point
The global system that sustained the U.S. market’s extraordinary rise since 2008 is breaking. The conditions that allowed for shallow corrections and quick rebounds—coordinated central banks, a compliant public, and stable geopolitics—no longer exist. We are now in the early phase of a multi-year transition characterised by structural, political, and market instability.
The age of U.S. exceptionalism, as expressed through its stock market dominance, is ending—not in silence, but with tariffs, fragmentation, and volatility.
For investors, the era of blind optimism is over. Navigating this new environment requires a strategy grounded in realism, discernment, and adaptability.
Our Global Trend Report offers precisely this edge—delivering analysis and indicators that identify abnormal market behaviour, flag unsustainable trajectories, and uncover emerging opportunities amidst the noise.
We monitor financial assets closely and diagnose emerging non-sustainable regimes. Aiming to provide timely insights and advance warnings of impending crises, including both uptrends and their inevitable crashes, as well as opportunities presented by downtrends and subsequent rallies. By identifying these patterns early, we hope to empower investors and institutions to take proactive measures to mitigate risks and capitalise on opportunities.
