It was a dark Friday for Wall Street on 27 March. Oil prices were climbing and the war with Iran raged on. Markets responded accordingly, with the Dow and Nasdaq entering correction territory, falling more than 10% below their peak, after a month of selloffs.<\/p>\n
Fast forward seven weeks later to 13 May, and the situation in Iran only looked marginally better. Oil prices were high, and the strait of Hormuz was still closed. Peace talks with Iran seemed tenuous, even with the pressures of high gas prices. Donald Trump on Wednesday said<\/a> he is \u201cnot even a little bit\u201d motivated by Americans\u2019 financial situation to end the war.<\/p>\n And yet, stock markets have not only recovered from their losses \u2013 they are thriving.<\/p>\n Even before the start of the war, the US stock market proved incredibly resilient to political and economic instability. The market has shrugged off the Covid-19 recession and generational-high inflation, absorbed Russia\u2019s invasion of Ukraine and increasingly turned a blind eye to Trump\u2019s tariff spats. Everyday Americans continue to struggle with an affordability crisis and consumer confidence has crashed, but the markets just keep going up and up.<\/p>\n Yes, Wall Street still has its down days. But the tech-heavy Nasdaq index has continued to surge amid continued investment in AI. The index has gone up 11% since the start of the year \u2013 nearly half of the gains that it saw last year. The Dow and S&P 500 continue to bump close to record highs.<\/p>\n Each time investors shake off the latest shock and reach new highs, questions arise: what is driving this phenomenon, and how long can this bull market last?<\/p>\n Guardian graphic. Source: S&P and Dow Jones Indices via Yahoo Finance Illustration: Guardian Design <\/p>\n Guardian graphic. Source: S&P and Dow Jones Indices via Yahoo Finance<\/p>\n Every day is Taco day<\/p>\n Some economists point to a mindset that investors have embraced \u2013 that the president will back off of his most extreme policies: Trump Always Chickens Out, or Taco.<\/p>\n Backtracking threats has been a hallmark of Trump 2.0, particularly when it comes to tariffs and Iran. When Trump announced his slate of \u201cliberation day\u201d tariffs, he delayed implementing them hours after they were announced. He similarly threatened a 25% tariff on eight EU countries when he was angry about annexing Greenland. Those tariffs were also called off.<\/p>\n Now, even as Trump says the Iran ceasefire is on \u201clife support\u201d, markets still keep going up.<\/p>\n But as Eswar Prasad, a former IMF official and an economist at Cornell, points out, investor confidence in the midst of the crisis predates Trump and Taco.<\/p>\n \u201cInvestors now have a pretty clear view that if there is significant trouble in the financial system, the [US Federal Reserve] and the US government will step in and not let things get too deep into the hole,\u201d Prasad said.<\/p>\n But federal intervention in a crisis, say the collapse of regional banks such as Silicon Valley Bank<\/a>, whose depositors were bailed out by the government, can hide risks, said Prasad, especially when supervision and regulation of financial markets are weakening.<\/p>\n \u201cThis is a concern we already saw with how ineffective supervision led to problems with Silicon Valley Bank and First Republic<\/a>\u201d in 2023, Prasad said. \u201cThe question is, where is the risk being hidden right now?\u201d<\/p>\n The K-shaped economy<\/p>\n Though inflation has come down since its 40-year high in 2022, Americans are still feeling the pain of increased prices. Amid the war on Iran, inflation has started to go up once again. In April, annual inflation surged to 3.8%<\/a>, up from 2.4% in February.<\/p>\n Higher prices would typically mean less spending among all Americans. But instead, wealthier Americans continue to spend while lower-income Americans try to manage their budgets.<\/p>\n The most recent evidence of this came through a report from the New York Federal Reserve, which showed that while low-income Americans have cut down<\/a> on their gas usage amid the Iran war, high-income Americans haven\u2019t changed their gas consumption at all.<\/p>\n Economists have started to refer to this phenomenon as the \u201cK-shaped\u201d economy<\/a> to represent the bifurcated experience of Americans whose wealth is tied to the stock market, and have thus been doing really well over the last few years, and those who are not.<\/p>\n The vast majority of the stock market is owned by just a small chunk of Americans: the top 10% income percentile in the US owns 87.2% of the market. The bottom 50% own just 1.1% of all stocks.<\/p>\n Continued spending from the top has kept many companies afloat as other consumers cut spending.<\/p>\n \u201cOur consumers, which sit at the top of the \u2018K\u2019, are continuing to invest in travel, it\u2019s their priority, and they want to have that experience,\u201d Ed Bastian, the Delta Air Lines CEO, told CNBC<\/a> last month when the company announced its quarterly earnings, noting that revenue from Delta\u2019s premium offerings doubled over the last year.<\/p>\n Though the rising stock market has kept a handful of Americans happy and spending, recent polls show that a majority of Americans currently disapprove<\/a> of Trump\u2019s handling of the economy, and 63% said they specifically blame Trump for recent high gas prices.<\/p>\n Rising tide lifts all<\/p>\n The release of ChatGPT in 2022 kicked off a race to build up AI systems and the infrastructure needed to support it. Tech companies are spending hundreds of billions<\/a> on AI investments, with no end in sight. Thousands of data centers are being built<\/a> around the country. This colossal investment in AI has been immune to the geopolitical events seen over the last few years.<\/p>\n Now, just seven companies out of the S&P 500 carry 30% of the index\u2019s weight. All of them are tech behemoths who have heavily invested in AI in recent years: Alphabet (Google\u2019s parent company), Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.<\/p>\n Nvidia, which produces and sells the microchips needed to power AI, currently tops the S&P 500 and was the first company to reach a $5tn valuation last fall. Its stock has gone up 1,450% over the last five years.<\/p>\n The huge amounts of spending in AI in such a short amount of time have raised concerns among those who believe that there is an AI bubble holding up the stock market. AI spending outpaced consumer<\/a> spending as a percentage of US economic growth in the first half of 2025.<\/p>\n \u201cIn a weird way, we have the largest private sector stimulus program in US history,\u201d said Paul Kedrosky, an investor and research fellow at the MIT\u2019s Institute for the Digital Economy. \u201cThe private sector is spending so aggressively on this one thing.\u201d<\/p>\n