Photo by Denise Chan on Unsplash
 

While having only 4.22% share of the global population, the United States serves as the world’s repository of capital. According to SIFMA research, foreign gross activity in U.S. securities increased 33.8% year-over-year in 2024 to $134.7 trillion.

In 2024, The Economist placed the U.S.’ share of global stock market capitalization at 61%. And as Europe pursued crippling net-zero policies, failed to respond to the Nord Stream pipeline bombing, and was left with the wealth-draining proxy war against Russia, investors should expect that dominance to climb even higher.

Therefore, the S&P 500 (SPX) index effectively represents the state of the world’s economy as it tracks around 80% of the total US stock market value. When investors in any part of the world say “the market is up”, they often refer to the S&P 500.

Year-to-date, the SPX index has risen 15.84%, beating the average annual return of 10.54% since 1957. According to Gallup, consumer stock ownership has been oscillating between 62% and 52% since 1998, now at 62% in 2025, revisiting the highs of early 2000s.

For investors, these dynamics underscore why the S&P 500 remains the world’s primary market barometer as we assess its prospects ahead.
 

Expected Gains from the Fed’s Liquidity Boost

In the right conditions, when the Federal Reserve lowers interest rates (Fed funds rate), the central bank widens the spread between what commercial banks pay (to borrow) and what they earn (on loans). In turn, this incentivizes more lending, which boosts the liquidity of the entire economy.

This liquidity spillover was clearly exemplified between 2020 and 2022 when Bitcoin’s price benefited from the Fed’s rate cuts, as a safe-haven, earnings-free asset. However, according to the FOMC summary of economic projections for the Fed funds rate, the near-zero level of that era are no longer expected.

Instead, beyond 2025’s median 3.6%, the lowest projected interest rate level into 2026 and 2028 is at 3.4% and 3.1% respectively.

The next rate cut is expected in December, the likelihood of which has now climbed to 82.9% according to CME’s FedWatch Tool. The January rate cut probability climbed above 50% recently. With both rate cuts, the current effective Fed funds rate at 3.75%-4.00% range should drop to 3.25%-3.50% by February.

According to the latest JPMorgan projection, the Fed’s easing could put SPX at a new record of 8,000 in 2026, from the present 6,797, giving investors a potential 17.7% profit boost. This forecast aligns with Deutsche Bank as well, also putting the SPX growth at 8,000 by the end of 2026, with earnings-per-share hitting $320.

However, it is uncertain how much the market has already priced in. Bank of America’s projection is more conservative, putting the SPX top at 7,100 in 2026. Much of that uncertainty comes from AI-related exposure.
 

AI Commitments and Monetization Doubts

According to BofA Securities research, the four hyperscalers – Amazon, Meta, Microsoft, Alphabet – accumulated $121 billion worth of investment-grade issuance YTD, as the total amount of new bonds (debt) issued.

In other words, on the expectation of AI deployment to boost productivity, they’ve sold $121 billion in high-quality corporate bonds this year. For 2026, this debt load is expected to normalize at $100 billion. Overall, this implies Big Tech growth at around 18%, or at 1.3 price-to-earnings growth (PEG).

Suffice to say, AI now underpins the entire US stock market valuation, spanning from the energy sector and the military industrial complex to even biotech companies using AI. The problem is, belated energy infrastructure investments are proving to be a bottleneck for AI deployment, despite recent efforts to kickstart old nuclear reactors.

The relationship with China also remains precarious, following the decades-long bipartisan consensus to make it the world’s industrial hub. This also includes dependency on critical rare earth elements (REEs), which the Trump admin started addressing.

Overall, BofA Securities research suggests that more rate cuts would be needed to offset the risk to AI-related commitments. The bank’s analysts put the GDP growth forecast at 2.4% for 2026. The Atlanta Fed’s latest GDPNow model from Wednesday puts the Q3 real GDP growth at 4%, which is down from the previous forecasting of 4.2%.

The bottom line is, the stock market now rides with AI advancements. As Google’s Gemini 3 recently showcased, each reasoning and reliability milestone is likely to boost the market.

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