Resources/Weekly Insights

Volume 14, Edition 16 | May 18 - May 24, 2025

Debt and Stocks: A Tale of Two Timelines

Doug Walters, CFA

With US debt continuing to climb, many investors are asking what it means for the markets. This week we explore the disconnect between fiscal concerns and stock market performance—why the near-term may look very different from the long-term.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

This week, the U.S. House of Representatives passed another spending bill that will add to the national debt—already approaching $37 trillion and growing. Unsurprisingly, this has reignited concerns among investors and commentators about the sustainability of our fiscal path. While the long-term implications are serious, the near-term impact on the stock market will inevitably be less straightforward.

It’s a paradox that continues to challenge conventional thinking: how can stock markets remain buoyant while government debt piles up? Part of the answer lies in understanding how markets process risk—and over what time horizons.

In the short run, increased government spending can act as a stimulus. Whether through infrastructure investment, defense contracts, or tax cuts, money flows into the economy and supports corporate revenues and consumer demand. In the short-term, that can be a boost for investors.

It is important to remember that the stock market is not the economy, and certainly not the government balance sheet. Equity investors are primarily focused on earnings growth, profitability, and corporate balance sheet strength. As long as the looming shadow of the national debt accumulation doesn’t immediately disrupt those pillars, markets can remain relatively unfazed.

The longer-term picture could be less forgiving. Persistent deficits and a ballooning debt burden could eventually erode the government’s fiscal flexibility, limiting its ability to respond to future crises. If debt grows faster than the economy over time, it can lead to higher borrowing costs, inflationary pressures, or a loss of confidence in U.S. fiscal management—each of which carries potential risks for investors.

These risks are present, but with no guarantee on how they will manifest. Let’s take Japan for example. Japan’s debt to GDP ratio hit 135% in 2000 (similar to the current US ratio). For the past 15 or so years, Japan’s ratio has exceeded 200% (peaking at 260%). For those same 15 years, the Japanese stock market is up nearly 400%. Not exactly an apocalypse. And Japan doesn’t have the US’s benefit of printing the world’s reserve currency. That doesn’t make such debt levels desirable, they are not. It merely highlights that markets can tolerate imbalance for long periods of time.

For investors, the key takeaway is this: what may be unsustainable in the long run can be stimulative, or at least tolerated, in the short run. There is a danger in assuming the market will punish fiscal imprudence on a convenient timetable. History shows it often doesn’t.

This doesn’t mean ignoring fiscal risks. But it does mean acknowledging the complexity of market behavior. As always, the best approach is to stay disciplined, stay well-diversified, and avoid trying to market time and always uncertain future—debt and all.

$ 36.9

National debt in trillions

The debt burden is large and will have to be addressed, but that doesn’t necessarily mean stocks need to fall. Market-timers beware.

$ 3.8

House bill debt in trillions

The House bill is forecast to add to the debt load, though it will face scrutiny in the Senate before becoming law.

Headline of the Week

Bond Vigilantes 2.0

Wikipedia sources “bond vigilante” back to Ed Yardeni in the 1980’s referring to bond market participants selling Treasuries to express displeasure with fiscal policies. The 1-2 punch from the loss of our last AAA rating and the potential deficit increases resulting from Congressional legislation, launched this latest incarnation. While yields have not moved as dramatically as in previous vigilante attacks, there does appear to be a re-awakening in the bond market.

Much in economics comes down to supply and demand dynamics. In this case, increased deficits point to an ever-increasing supply of Treasuries. And the demand side of the equation is in the initial stages of determining the “right” yield to absorb this increased supply. Thus, we have seen longer-term yields increase, causing bond prices to decrease. So, while the supply situation appears more probable, the demand side remains more flexible and subject to more moving parts.

The Week Ahead

A short week is coming up as markets will close on Monday in observance of Memorial Day. But don’t sell next week short, as it is packed full of new data from key economic indicators, the FED, and Nvidia.

Minutes from the last FOMC meeting will be released on Wednesday. The FOMC minutes give investors insight into the views of committee members on the state of the economy and potential headwinds such as slowing growth and inflation. Perhaps most important to investors, any insight into when and how many rate cuts will occur this year.
Speaking of slowing growth; on Thursday, we get a second Preliminary GDP reading for Q1 2025. The reading is not expected to revise the previous reading which had the economy contracting 0.3% in the first quarter.
The Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures Ex Food & Energy (Core PCE), is released on Friday. Core PCE is expected to remain at 2.6% year-on-year, increasing just 0.2% from last month. Though still holding above the Federal Reserve’s target of 2%.

Should the economic readings come back in line with investors’ expectations, don’t expect much in terms of a market reaction. However, should GDP slow further or PCE come in hotter than expected, the sell America trend could continue.

Lag Seven Earnings

Since the start of the year, the Magnificent Seven have lagged the S&P 500. Nvidia aims to change that on Wednesday as it reports Q1 earnings. Investors will be closely watching for resilience in earnings growth and strong forward guidance from the AI chip leader. This comes at a time when many other S&P500 companies have revised their earnings growth downward for the year ahead.

CEO Jensen Huang is expected to address several important topics in his earnings call; including, a $5.5 billion write-off tied to the company’s H20 chips, which were designed to be sold to China. New US export restrictions blocked the sale of those chips to China.
Additionally, some attention could be focused on the company’s growth in the Middle East. This follows an announcement during President Trump’s trip to the region, that tech giants OpenAI, Oracle, Nvidia, and Cisco will be working together to help build the Stargate Artificial Intelligence campus in the United Arab Emirates.

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