World’s heavy exposure to US stocks raises risk:Gita Gopinath

The American stock market, buoyed by enthusiasm around artificial intelligence, is hovering near record highs a surge that former IMF chief economist Gita Gopinath says could be laying the groundwork for a global financial shock.In a recent column for The Economist, Gopinath compared the current boom to the late 1990s tech frenzy that culminated in the dotcom crash of 2000. While innovation continues to boost productivity, she urged that “today’s rally may be setting the stage for another painful market correction,” one that could have far-reaching and more severe global repercussions than the last crash.
According to Gopinath, the biggest vulnerability lies in the world’s deep dependence on U.S. equities. Over the past 15 years, American households and foreign investors have heavily increased their exposure to U.S. markets, driven by the dominance of tech firms and consistent returns.She estimated that a correction comparable to the dotcom crash could erase over $20 trillion in household wealth, roughly 70% of America’s 2024 GDP surpassing early 2000s losses. This could have ripple effects across global markets due to the high concentration of global capital in U.S. financial assets.Despite expectations that tariffs and expansionary fiscal policies would strengthen the dollar, the currency has instead weakened against most major peers. Gopinath attributed this to “foreign investors hedging against dollar risk,” reflecting what she termed a “waning confidence” in U.S. economic stability.
She also indicated that doubts over the independence of American institutions particularly the Federal Reserve  could further erode global trust in the dollar and U.S. assets.Unlike in 2000, Gopinath noted, policymakers now face far fewer tools to cushion the economy from shocks. High government debt levels and rising tariffs are constraining flexibility, while geopolitical tensions from Chinese export controls to U.S. trade measures  are stifling global growth.“Further tit-for-tat tariffs between America and China would damage global trade,” she wrote, warning that nearly all economies remain deeply tied to the world’s two largest markets through intricate supply chains.
Gopinath emphasized that the real problem is not unbalanced trade but unbalanced growth, with productivity and returns concentrated largely in the U.S. “The foundations of asset prices and capital flows have become increasingly narrow and fragile,” she observed.The solution, she asserted, lies in diversifying global growth. Encouragingly, some capital is beginning to flow back into emerging markets and other regions. However, she urged policymakers worldwide to avoid “chaotic or unpredictable policy decisions,” especially those undermining central-bank independence.Only by fostering broad-based growth and restoring confidence in stable governance, Gopinath concluded, can the global economy avert the next major market collapse.

(Business Correspondent)