Wall Street has shown remarkable resilience in the face of war, inflation and trade disputes, with major indices recovering from a sharp selloff to reach near-record highs. Despite the Iran conflict and volatile tariff announcements, the Dow Jones and Nasdaq have rebounded from correction territory in late March to post gains by mid-May.
The Nasdaq index has climbed 11 per cent since the start of the year, driven largely by continued investment in artificial intelligence. Meanwhile, the Dow and S&P 500 are hovering close to record highs. This buoyancy stands in stark contrast to the struggles of ordinary Americans, with consumer confidence having fallen sharply amid an affordability crisis.
Investor optimism appears to rest on two pillars: the belief that President Donald Trump will eventually back down from his most extreme policies – a mindset dubbed “Taco” (Trump Always Chickens Out) – and the expectation that the Federal Reserve will intervene to prevent any deep financial crisis. The Fed has previously stepped in to protect depositors at Silicon Valley Bank and First Republic, masking risks from weakening supervision.
According to Eswar Prasad, a former IMF official and economist at Cornell University, investors are confident that the Fed and the US government will act decisively if trouble emerges. However, he warns that such intervention can hide risks, particularly as financial regulation is relaxed. “The question is, where is the risk being hidden right now?” he said.
The market’s strength is increasingly tied to a “K-shaped” economy, where wealthy Americans – who own the vast majority of stocks – continue to spend while lower-income households cut back. The top 10 per cent of earners own 87.2 per cent of the market, while the bottom 50 per cent own just 1.1 per cent. Inflation has also crept back up to 3.8 per cent in April, from 2.4 per cent in February, adding to the strain.
As a result, the stock market appears to have decoupled from the everyday financial reality of many Americans, raising questions about how long the bull run can last.
