History does not repeat itself, but it rhymes with blood and money.
While Washington celebrates the “neutralization” of Maduro in Venezuela, Wall Street is preparing to experience a basic law of nature: Whoever lives by the sword dies by the sword.
If Venezuela collapsed because its leadership was betrayed by its own people, the American market risks collapsing from its “exceptionalism”.
The Artificial Intelligence bubble is creaking, the Japanese carry trade threatens violent capital repatriation, and a potential flare up in Taiwan is enough to wipe out 35% of the capitalization of the S&P 500 in a single night.
Those who believe that the “party” will never end should look at Oracle. The “canary in the coal mine” has already died.
The countdown to the great crash has begun and this time no aircraft carrier will be able to save investors’ accounts.
First of all, a correction
As reported in an article on Project Syndicate by Desmond Lachman, senior fellow at the American Enterprise Institute, “In a recent speech, US President Donald Trump stated that ‘the only thing that is really going up, and going up a lot, is the stock market and your retirement account’”.
He is right: all the major US stock market indices recorded double digit percentage gains in 2025, the analyst notes.
However, the November midterm elections are still far away. If there is a market correction in the meantime, Trump’s economic point of pride could turn into a liability.
Unfortunately for Trump, a market correction (a 10-20% decline) looks particularly likely this year.
There is an unusually high degree of optimism embedded in market prices, which makes stocks vulnerable to a large retreat in the event of an economic setback, something that could be triggered by any number of economic or political “known unknowns” before the midterm elections.
Let us examine the current degree of optimism. It is an understatement to say that stocks are highly valued, in reality, they have been priced for economic perfection.
As measured by the cyclically adjusted Price Earnings ratio, the S&P 500 is valued at more than twice its long term average, and close to its peak before the dot com crisis in 2001.
And as measured by the Buffett Indicator, the ratio of total US market valuation to US GDP, the market is trading at a historic record, around 50% above its 2008 high.
Another sign of optimism is the current enthusiasm of fund managers.
According to Bank of America, these influencers are more enthusiastic now than at any point over the past three years, while their current cash holdings have fallen to an all time low.
Such sentiment, and the bets that arise from it, appear to place the market in a position of retreat should the economy weaken in the coming months.
Why could this happen?
According to Lachman, it is enough to think about the US public finances, combined with the threat posed by Trump to the independence of the US Federal Reserve, to predict the return of the bond market vigilantes and a rise in long term interest rates.
In addition, the US high dependence on foreigners to finance its 2 trillion dollar deficit increases the risk.
If foreigners believe that the US government will attempt to “inflate away” its debt, they will demand higher yields on the bonds they hold, raising the cost of mortgages, car loans, and other forms of borrowing.
Another risk is the Artificial Intelligence bubble (AI), which could burst or deflate at any moment.
The risk is particularly acute, given that up to half of US GDP growth comes from investment in AI.
Moreover, the collapse of the AI bubble would have a psychological impact on the stock prices of the so called Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla), whose combined valuation reaches approximately 35% of the S&P 500.
Oracle, which saw its share price fall already 30% in the previous quarter, could serve as the “canary in the coal mine”.
The American stock market could also be shaken by economic upheavals abroad.
One such upheaval could come from China, which continues to rely excessively on an economic model based on investment and exports.
With China’s trade surplus now exceeding 1 trillion dollars, the strengthening of protectionism in the US and Europe becomes more likely, resulting in further fragmentation of the international trading system.
Another upheaval could come from Japan, where fiscal policy inconsistencies under Prime Minister Sanae Takaichi have raised fears of a “Liz Truss moment”, which could lead to a sharp rise in Japanese government bond yields (as happened in the United Kingdom in the autumn of 2022).
If this happens, we could see turmoil in the Japanese carry trade (borrowing in a country with a lower interest rate to invest in assets elsewhere) and the repatriation of Japanese capital that has supported the US financial markets.
Military operation
Finally, as demonstrated by the US military operation against Venezuela, unpredictable or underestimated geopolitical events can disrupt financial markets.
Even before Trump announced that the US intends to “control” Venezuela until a “proper” transition process takes place, China was conducting military exercises in the Taiwan Strait and Russia was delaying a peace agreement with Ukraine.
China may try to exploit this situation to regain control of Taiwan, while Russia may be encouraged to put forward even more ambitious demands for territorial concessions from Ukraine.
Even the smallest probability of a conflict over Taiwan should cause serious concern, given that the country supplies more than half of global semiconductor products.
If those who live by the sword die by the sword, the same may apply to stock prices ahead of this year’s midterm elections.
By emphasizing how well the stock market is performing now, Trump may be creating expectations that will disappoint him if any of the many risks materialize, Desmond Lachman concludes.
Desmond Lachman, senior fellow at the American Enterprise Institute, is a former deputy director of the International Monetary Fund Policy Development and Review Department and former chief emerging markets strategist at Salomon Smith Barney.
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