Over the past five years, US equities have defied gravity, powering through a pandemic, supply chain chaos, and a historic tightening cycle to post record highs.
Wall Street cheered, tech stocks soared, and valuations reached levels unseen since the dot-com era.
For many, the rally became self-fulfilling: every dip was bought, every correction shallow.But now, the tide seems to be turning.Beneath the surface of buoyant indices, a very different story is unfolding.
Economic momentum is stalling, inflation expectations are resurfacing, and the once-reliable American consumer is showing signs of fatigue.
Meanwhile, housing activity is cooling, job market cracks are widening, and one of the worlds most respected investors is heading for the exit.Put simply: the glow is fadingand investors are starting to take notice.Heres why the US equity rally may be running out of steam.Live Events1.) Investors are already pulling backCapital is quietlybut decisivelyflowing out of US equities.
In just the past few weeks, US equity mutual funds and ETFs have recorded net outflows of nearly $18 billionthe largest since April 2024, and among the biggest in two years.That speaks volumes.
In a market where cash typically chases momentum, these outflows reflect growing caution among investors, even as the broader indices still hover near record highs.Adding to this shift is Warren Buffett himself.
The legendary investor has been steadily reducing Berkshire Hathaways exposure to equities, selling a massive $174 billion worth of stocks over the past 10 quarters.
In Q1 2025 alone, he offloaded another $1.5 billionmarking the tenth consecutive quarter of net sales.The reason? Valuations that simply dont make sense anymore.
Buffett Indicator (Market Cap-to-GDP Ratio): Often used as a broad measure of market valuation, this ratio compares the total value of the stock market to the size of the economy.
As of Q1 2025, it stands at an alarming 202.8%nearly twice its historical average of around 85%.
For context, levels above 120% have typically preceded major market corrections, suggesting equities may be significantly overvalued.
Shiller P/E Ratio (CAPE Ratio): This valuation metric smooths out earnings over 10 years to account for economic cycles, offering a long-term view of whether the market is cheap or expensive.
It currently sits at 36.8more than double its 150-year average of 17.24.
These levels were last seen during the height of the dot-com bubble, with sobering consequences thereafter.The takeaway? Market signals are pointing to a dangerous disconnect between soaring valuations and underlying fundamentals.2.
GDP slips into the red as consumer spending loses steamThe U.S.
economy slipped by 0.2% in the first quarter of 2025, but the drop isnt necessarily a red flagat least not yet.
Much of the weakness came from a surge in imports, as businesses rushed to build inventories before new tariffs kicked in, temporarily tilting the numbers.Yet, some red flags are emerging beneath the headline GDP figure: personal spending increased at the weakest pace in almost two years, potentially pointing to growing uncertainty among consumers.ETMarkets.comThat concern is being echoed in more recent data.
Retail sales fell for a second consecutive month in May, down 0.9%the steepest drop of the year.A downward revision to Aprils numbers adds to the unease.
With inflation still elevated and tariffs pushing up costs, consumers appear to be scaling back.Confidence data only deepens the concern: Americans now rate their financial situation lower than at any point in the past 12 years, while expectations for food and rent inflation continue to risesuggesting demand could soften further in the months ahead.3.
The housing market is losing steamThe US housing market is beginning to show clear signs of strainchallenges that appear structural rather than merely cyclical.
This week delivered a trio of signals pointing to a slowdown.First, the National Association of Home Builders Index unexpectedly fell, slipping to levels last seen during the early days of the 2020 lockdowns.Second, both housing starts and permits declined more than anticipated, signalling a pullback in future construction activity.Third, homebuilding corporations are beginning to feel the pressure.
Recent earnings from major players in the sector have fallen short of expectations, reflecting slower home sales and tightening profit margins.Despite constrained supply keeping prices elevated, high mortgage rates and deteriorating affordability are weighing on demand.
Meanwhile, inventories are starting to risea red flag for builders still cautious in the shadow of the 2008 housing bust.4.
Debt surge clouds the fiscal outlookAmericas debt burden has reached a historic high, now standing at 124% of GDPa level that recently prompted a credit rating downgrade from Moodys.The warning lights are flashing brighter as U.S.
President Donald Trumps upcoming One Big Beautiful Bill, is expected to add $2.4-2.8 trillion to the federal deficit over the next decade, and up to $3.3 trillion once interest costs are included.On top of that, the bill seeks to raise the debt ceiling by $45 trillion, opening the door for even more borrowing.This comes at a time when the U.S.
is already spending nearly 3% of its GDP just on interest paymentsthe highest among advanced economies.As debt continues to climb, the risks are becoming harder to ignore slower economic growth, rising borrowing costs, and growing investor unease.5.
Data is consistently disappointingThe US Economic Surprise Index has tumbled to -23, its lowest level in nine months.
Most key economic indicatorsfrom manufacturing and services PMIs to industrial productionhave consistently missed expectations.Manufactured goods orders plunged 6.3% in Aprilthe sharpest drop since early 2024.
When economic data keeps underwhelming, investor enthusiasm eventually starts to crack.Technical outlookGiven the prevailing macro and market conditions, the technical outlook for U.S.
equities is also flashing caution.The S&P 500 has climbed back to a critical resistance zone6,200 to 6,300levels that marked the start of a sharp decline earlier this year.
But momentum is fading, and volatility is starting to stir.This confluence suggests the rally may be running out of steam, with the index vulnerable to a pullback toward 5,682, and if selling intensifies, potentially down to 5,453.Meanwhile, the Nasdaq 100 appears to be echoing a familiar pattern.
From current levelswith the RSI firmly in the overbought zonethe uptrend looks fragile.If sentiment weakens, the index could slip toward 21,150, with a deeper correction potentially dragging it closer to 20,400.Yes, markets are forward-lookingbut when the road ahead is lined with margin compression, earnings risk, rising layoffs, weakening demand, and unsustainable debt servicing costs, the case for caution becomes hard to ignore.
The cracks beneath the surface are getting harder to dismiss.(The author Amit Pabari is MD at CR Forex Advisors)(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own.
These do not represent the views of the Economic Times)