The financial system of the United States currently represents a major source of risk for the global economy and for investors. It is a risk with multiple origins, including political, economic, public and private debt, stock market valuations, and the growth of cryptocurrencies. All these sources of risk create vulnerabilities for the dollar and for the U.S. financial system. In this context, the European Union must ensure that these risks do not become systemic, and European investors should approach investments in the U.S. with great caution. FOMO, Fear Of Missing Out, has never been, and is not, a good investment advisor.
The American risk has several origins, all of them concerning. One of them is political, with the populist and authoritarian drift of the current administration, in the context of a society marked by declining trust and increasing polarization. Not only do erratic and dogmatic policies have negative long-term economic consequences, but they also undermine the values on which social life is built. Additionally, a once unthinkable scenario is now conceivable: internal fragmentation in a highly polarized country, potentially through social paralysis and civil disobedience in the event of manipulation of the midterm elections in November.
A second source of risk is economic. The apparent strength of the U.S. economy and the parade of announcements of major investments in heavy industry and digital infrastructure conceal a two-speed economy that continues to accumulate chronic current account deficits. On the one hand, there is a digital and defense sector with enormous growth in profits, valuations, and investment. On the other hand, many sectors and consumers are suffering from both national and global uncertainty, creating the possibility of a contraction in consumption in a context of rising inflation. This could lead to a dangerous scenario of stagflation, characterized by economic slowdown combined with rising prices of goods and services.
The third risk is the high level of public debt of the federal government, the third highest in the world as a percentage of GDP and the largest in absolute terms, already reaching 39 trillion dollars. Total debt, now at 125% of GDP, is becoming increasingly difficult to manage and refinance, particularly with an annual deficit exceeding 6% of GDP, which corresponds to a deficit of 27% of the federal budget of 7 trillion dollars. In addition, spending continues to rise, particularly in the military sector, with proposals for a 50% increase by 2027, and in social spending due to an aging population. Everyone knows that the trajectory of debt and deficit is unsustainable, yet no one appears willing to make the necessary sacrifices to restore sustainability. Interest rates on public debt have been rising and are already between 4% and 5% for medium and long-term maturities. There will come a day when markets wake up and demand a more realistic risk premium to hold U.S. debt. This situation calls into question the dollar’s status as the dominant currency and a safe-haven asset.
The fourth risk is the high level of stock market valuations. The valuation of equities relative to average historical earnings, measured by the CAPE ratio, stands at around 40 for U.S. stocks, represented by the S&P 500, compared to 22 for European stocks, represented by the STOXX 600. The historical benchmark is around 18, and during the dot-com crash it reached close to 45, meaning this indicator is sending a clear signal of exuberance in U.S. markets. These high valuations are particularly concentrated in technology companies. Around one third of the S&P 500 is made up of just seven technology firms, and the technology sector as a whole now accounts for roughly 50% of the index. These figures are only justified by expectations of very high profit growth in tech companies. That expectation appears to be supported by recent earnings reports from major firms. However, we are in a phase of the speculative cycle where company results are excellent but of lower quality, as they include many extraordinary gains that are unlikely to be repeated. For example, the recent announcement of an 81% increase in profits by Alphabet, Google’s parent company, takes on a different meaning when we learn that the entire increase is due to accounting gains from equity stakes in private companies such as SpaceX and Anthropic. In other words, the revenue and profit growth supporting massive investments in artificial intelligence and data centers is being generated by speculation surrounding AI itself. It is a house of cards built on top of a genuinely transformative innovation, artificial intelligence. Whether AI will generate real economic value translated into profits for the companies making these massive investments remains unclear, meaning that this house of cards could collapse.
In this context, market insiders argue that there is still room for further increases, as the final phase of speculative cycles typically occurs when insiders sell their shares to the public through waves of IPOs to generate liquidity and reduce their exposure to valuations they no longer believe in. The very recent and disappointing IPO of Bill Ackman’s private fund, as well as preparations for the 2026 IPO of SpaceX and other major AI companies, may signal that the market is reaching its peak. The recent decision by Nasdaq’s governing authority to ease listing requirements, accelerate the inclusion of new stocks in indices, thereby forcing passive funds to buy even at high valuations, and shorten lock-up periods for insiders, are highly concerning signs of mismanagement in U.S. markets. The pursuit of short-term profits appears to be overriding fundamental investor protection rules that have existed for decades and were designed to prevent abuses.
On top of all these risks, there is also the high level of indebtedness in private credit markets, which are already showing clear signs of financial stress, as well as speculation surrounding crypto assets. Companies described as “bitcoin treasury companies,” such as MicroStrategy, are taking on billions of dollars in debt, promising generous dividends and interest, while their only investment strategy is to buy bitcoin in the expectation that it will continue to appreciate over time. What MicroStrategy is doing is a crypto version of the infamous Ponzi scheme, examples of which include Bernie Madoff and Portugal’s Dona Branca. Those schemes were concealed because they were illegal. Now there is no need to hide, as this appears to be an accepted and even praised investment strategy.
Cautious and patient investors, such as Berkshire Hathaway, are already reducing their exposure to U.S. equities and holding 400 billion dollars in cash, waiting for a market correction. My concern is to ensure that European investors are aware of the risks of these investments, and that the eurozone has mechanisms in place to protect Europe from systemic risk originating in the United States. And when will we see a truly attractive European savings product, with tax benefits, that encourages Europeans to invest more within Europe?
Filipe Santos, Dean of Católica Lisbon School of Business and Economics