US Stocks Defy Shutdown: S&P 500, Dow Hit New Highs Amid AI Boom and Rate Cut Hopes

NEW YORK (AP) — The U.S. stock market continues its remarkable ascent, with the S&P 500 and Dow Jones Industrial Average reaching all-time highs, even as a government shutdown delays crucial economic reports. This resilience marks a significant moment, as Wall Street’s major indexes show broad strength, extending a rally that has seen the market surge 35% since April.

Beyond the usual dominance of Big Tech, led by AI darlings like Nvidia, the current bull run is widespread. The Russell 2000 index of smaller stocks has also achieved a new record, recovering nearly four years of losses. In an unusual market confluence, gold has hit a record high, and the most popular U.S. bond fund is on track for its best year in at least five. This performance largely hinges on the expectation that, much like past instances, the government shutdown will have minimal long-term impact on the economy or stock market.

However, the optimistic outlook is not without its risks. Critics point to elevated stock valuations, with measures like Nobel laureate Robert Shiller’s cyclically adjusted price-to-earnings ratio showing the S&P 500 near levels last seen during the 2000 dot-com bubble. Ann Miletti, head of equity investments for Allspring Global Investments, expresses concern over the rapid rise of speculative, money-losing companies, noting that such ‘little bubbles’ are generally not a good sign, despite overall optimism for 2026.

For current valuations to normalize, corporate profits must continue their upward trajectory. The upcoming earnings season, kicking off with PepsiCo and Delta Air Lines, followed by major banks like JPMorgan Chase, is crucial. Analysts anticipate an 8% collective growth in S&P 500 earnings per share from a year earlier, with sustained growth forecasts essential to justify current prices amidst challenges like tariffs and persistent inflation.

A primary driver of the market’s boom remains the expectation of multiple interest rate cuts from the Federal Reserve. Wall Street traders largely foresee at least three more cuts by mid-next summer, as the job market shows signs of slowing. However, Fed Chair Jerome Powell has cautioned that plans could shift if inflation, which remains above the 2% target, is reignited. Miletti emphasizes that Fed expectations are ‘driving everything right now,’ warning that a deviation from anticipated cuts could severely impact speculative market segments.

The long-term sustainability of the AI boom is also a critical factor. Yung-Yu Ma, chief investment strategist at PNC Asset Management Group, believes AI-related stocks are not overly expensive, provided the industry maintains its explosive growth. The hope is that AI will significantly boost economic productivity, offsetting inflationary pressures and the increasing national debt. Ma concludes, ‘Everyone is tying their fortunes to that ship, whether they realize it or not.’

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