Could a financial crisis occur in the United States in the near future?

Fin­an­cial mar­ket par­ti­cipants do not cur­rently believe that a major fin­an­cial crisis will occur in the United States. Indeed, the long-term interest rate (10-year gov­ern­ment bond yield) is close to 4%, while nom­in­al growth in the recent peri­od has been above 6%; the euro is worth $1.18, which does not indic­ate any vis­ible under­valu­ation of the dol­lar; the S&P 500 index has remained unchanged since the begin­ning of the year, but has ris­en by 12% over the past year. Anti­cip­a­tion of a fin­an­cial crisis would imply a sharp rise in long-term interest rates, a sharp decline in the dol­lar and a fall in US stock mar­ket indices. How­ever, there are con­cerns about the effects of the Trump administration’s policies, the high valu­ation of equit­ies and the very high level of pub­lic defi­cit, and there are fears that a fin­an­cial crisis could break out in the United States.

The Trump admin­is­tra­tion is pur­su­ing policies that are dan­ger­ous for fin­an­cial sta­bil­ity. First, there is the attempt to take con­trol of the Fed­er­al Reserve, with the appoint­ment of Kev­in Warsh as its future chair, accom­pan­ied by leg­al pro­ceed­ings against Lisa Cook, a mem­ber of the Fed’s Board of Gov­ernors, and the cur­rent chair, Jerome Pow­ell. We know that Don­ald Trump wants a sharp drop in short-term interest rates (he has spoken of a tar­get interest rate of 1% com­pared to 3.5% today), which risks under­min­ing the Fed­er­al Reserve’s cred­ib­il­ity. Then there is the decline in the budgets of fed­er­al research agen­cies and uni­ver­sit­ies and the rejec­tion of immig­ra­tion. The num­ber of immig­rants in employ­ment has fallen by 1 mil­lion since Don­ald Trump arrived at the White House. The Trump administration’s decisions could lead to a decline in demand for US Treas­ury secur­it­ies and a depre­ci­ation of the dol­lar, due to the Fed­er­al Reserve’s loss of cred­ib­il­ity and the United States’ reduced attract­ive­ness to for­eign investors.

The US equity mar­ket is very expens­ive, as shown by the P/E ratio (price-to-earn­ings ratio) of 28 for the S&P 500, as also shown by Shiller’s CAPE (the CAPE is the ratio of mar­ket cap­it­al­isa­tion to 10-year smoothed earn­ings adjus­ted for infla­tion), which stands at 41, very close to its 2000 peak (44) and high­er than its 1929 level before the onset of the Great Reces­sion (32).

This very high valu­ation of the US equity mar­ket is due to the massive use of mar­gin cred­it (cred­it with mar­gin calls to buy shares), which rose from $600 bil­lion at the begin­ning of 2023 to $1.24 tril­lion in Janu­ary 2026. His­tory shows that very high stock valu­ations are fol­lowed by peri­ods of decline in stock mar­ket indices; moreover, fin­an­cing stock pur­chases with cred­it increases the risk of fin­an­cial instabil­ity if the mar­ket declines. House­holds will have to sell part of their stock port­fo­lio at a loss to meet mar­gin calls.

The latest pro­jec­tions from the Con­gres­sion­al Budget Office (CBO) show that the fed­er­al defi­cit will be 5.8% of GDP in 2026 (the same fig­ure as in 2025) and will rise to 6.7% of GDP in 2036; the pub­lic debt ratio is 101% of GDP in 2026 and will increase to 120% of GDP in 2036 and 170% of GDP in 2056. This deteri­or­a­tion in pub­lic fin­ances is due to the tax cuts provided for in the “One Big Beau­ti­ful Bill Act”. It will be even great­er if mil­it­ary spend­ing does indeed increase by $1 tril­lion to $1.5 tril­lion in 2027, as announced by Don­ald Trump, and if some of the tar­iff increases inval­id­ated by the Supreme Court are not rein­stated (the tar­iff increases would gen­er­ate an addi­tion­al $250 bil­lion in tax rev­en­ue over a full year). The risk is that the United States will face a very high pub­lic defi­cit, com­pet­i­tion from Japan­ese gov­ern­ment bonds with the rise in long-term interest rates in Japan, and a reduc­tion in pur­chases of US Treas­ury bonds by Europeans with the increase in invest­ment and mil­it­ary spend­ing in Europe, which will reduce the cur­rent account sur­plus there.

We could there­fore see an increase in long-term interest rates in the United States, with the rise in pub­lic debt, the loss of cred­ib­il­ity of the Fed­er­al Reserve, and the decline in pur­chases of US Treas­ury secur­it­ies by non-res­id­ents; a sharp depre­ci­ation of the dol­lar, with the United States becom­ing less attract­ive to for­eign cap­it­al, wheth­er inves­ted in Treas­ury bonds or equit­ies; a sig­ni­fic­ant decline in the valu­ation of US equit­ies, due to their very high valu­ation and the rise in long-term interest rates.

The fact that US tech­no­logy com­pan­ies have decided to invest huge sums in arti­fi­cial intel­li­gence (600 bil­lion dol­lars of invest­ment in 2026 for Alpha­bet, Amazon, Meta, Microsoft and Oracle) could also con­trib­ute to a stock mar­ket crisis if the profits gen­er­ated by these invest­ments fall short of expect­a­tions, and to a crisis in the private debt mar­ket, since around half of these invest­ments are fin­anced on this mar­ket, with increas­ingly lax con­di­tions (light cov­en­ants, high leverage).

The con­sensus view of con­tin­ued low long-term interest rates, a reas­on­ably strong dol­lar, a rising stock mar­ket and a healthy private debt mar­ket in the United States is there­fore rather doubtful.