Highlights

• U.S. stock market nears record highs driven by AI optimism despite new tariffs.
• Gopinath warns a correction could erase USD 20 trillion in U.S. household wealth and USD 15 trillion globally.
• Declining confidence in the U.S. dollar and limited policy flexibility may worsen the next downturn.

The U.S. stock market is approaching record highs, buoyed by enthusiasm surrounding artificial intelligence (AI) innovations, even as trade tensions escalate following new tariffs imposed by President Donald Trump. According to former International Monetary Fund (IMF) chief economist Gita Gopinath, the surge bears resemblance to the late 1990s technology boom and could be setting the stage for a significant correction with global repercussions.

AI Momentum Drives Market to Near Peak Levels

Gopinath noted that the U.S. equity market’s rally—fueled by breakthroughs in AI and investor optimism—has drawn comparisons to the dot-com bubble that burst in 2000.

While advances in technology continue to improve productivity and transform industries, she cautioned that the current pace of market expansion may not be sustainable. In her analysis for The Economist, Gopinath warned that the U.S. market’s overvaluation, combined with heightened global exposure, could amplify the fallout of a future correction.

Potential USD 20 Trillion Wealth Loss Forecast

The concern extends beyond U.S. borders. Over the past 15 years, both American households and international investors have heavily invested in U.S. equities.

Gopinath projected that a correction similar to the early 2000s crash could erase more than USD 20 trillion in household wealth in the United States—an amount equal to approximately 70% of U.S. GDP in 2024. Such a decline could reduce consumption growth by 3.5 percentage points and cut overall GDP growth by around two percentage points, excluding secondary effects from weaker investment.

Foreign investors could face losses exceeding USD 15 trillion, representing roughly 20% of the rest of the world’s GDP.

Dollar’s ‘Flight to Safety’ Cushion Weakens

Historically, global investors have relied on the U.S. dollar’s tendency to strengthen during times of financial stress. This “flight to safety” effect has provided a buffer against losses in dollar-denominated assets.

Despite expectations that tariffs and expansionary fiscal policy would lift the dollar, it has weakened against major currencies. According to Gopinath, this trend signals waning global confidence as investors increasingly hedge against dollar exposure.

Concerns over the independence of American institutions, particularly the Federal Reserve, could further undermine trust in U.S. assets and the dollar’s safe-haven status.

Gopinath emphasized that avoiding unpredictable policy decisions and maintaining central bank independence will be key to stabilizing financial markets. She added that the world’s economic imbalance—where growth and returns are concentrated in a few regions, notably the U.S.—makes global markets more fragile.

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