Mohamed El-Erian: The U.S. stock market decoupling from the global gloom has limits

The U.S. may have decoupled from the global gloom for now but there are domestic limits to the economy's resilience and agility. Photo by TIMOTHY A. CLARY/AFP via Getty Images

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A string of record highs for the United States stock market might have seemed unlikely to many investors at the start of the year if they had known what was coming —a military conflict in the Middle East, a surge in global energy prices, serious disruptions to maritime supply chains and a mounting risk of global recession.

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After all, conventional wisdom dictates that such “geoeconomic” dislocations undermine corporate earnings expectations, increase investor risk aversion and suck capital out of stocks and into “safe assets” such as government bonds, gold and cash. Instead, we find ourselves in the opposite situation, a twilight zone of sorts.

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While the time horizons for a resolution of the war continue to be pushed out and the Strait of Hormuz remains essentially shut, U.S. stock market indices have gone from record to record on the back of — wait for it — higher corporate earnings and greater risk appetite. In the process, the start-of-year consensus trade has been negated.

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A commonly held view among investors and analysts in January was that there would be a pivot in 2026 away from “expensive” U.S. equities towards the “value” found in the rest of the world, particularly Europe. After all, the valuation gap between the S&P 500 and the Stoxx Europe 600 has dramatically widened.

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This thesis was derailed by the harsh reality of geoeconomics. The Middle East war laid bare the structural vulnerabilities of the European economy. The region has a heightened sensitivity to the energy shock, not just a price surge but also the threat of physical supply shortages. That and vulnerability to other disrupted supply chains transformed attractive valuations into more of a value trap. Meanwhile, the U.S. emerged as a market of choice as investors rewarded the economy’s relative energy independence and longstanding structural strengths.

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The increasing tech dominance of the U.S. economy has been equated by many to its robust macro fundamentals. In addition to breathtaking tech innovations that deliver productivity gains, America continues to benefit from a unique combination of corporate and labour market flexibility, deep capital markets, significant fiscal support and a central bank more hesitant to raise rates. The seemingly abundant availability of risk capital enhances the economy’s dynamism, allowing its corporate sector to navigate disruptions more effectively.

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The concentration of market leadership in a handful of tech groups has provided the broader market indices with a shield. These companies are not just growth plays; a few of them are also cash flow machines with fortress balance sheets that make them appear less like cyclicals and more like essential infrastructure for the modern economy. Their ability to generate earnings growth regardless of the geopolitical climate has decoupled the broader U.S. indices from the malaise affecting the rest of the world.

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Yet what results in relative dominance need not guarantee the continuation of a record-breaking run in absolute terms. There is a geoeconomic ceiling to even this market rally, and we will get there if the war is not resolved.