The S&P 500 has surged by an impressive 82% in three years, while the Fed reduced its balance sheet by 27%. This divergence between traditional liquidity and market performance challenges conventional theories, posing crucial questions for crypto investors. Digital assets, typically correlated with stock markets, are directly affected by this paradoxical dynamic.
Data shared by Charlie Bilello reveals a major anomaly: the S&P 500 climbs 82% while the Fed’s assets drop by a quarter. This performance contradicts the theory that liquidity injection by central banks constitutes the primary driver of stock market rallies.
Several factors explain this phenomenon. Massive budget deficits inject liquidity into the American economy, largely offsetting quantitative tightening. Corporate stock buybacks reach record volumes, creating artificial demand that supports valuations. Foreign capital flows, particularly into large-cap tech stocks, also play a decisive role.
EndGame Macro emphasizes that markets anticipate future policy changes more than current conditions. This psychological liquidity explains why stocks advance despite a contracting Fed balance sheet. The market prices in an 86% probability of a 25 basis point rate cut this week, reflecting accommodative expectations.
For crypto investors, this dynamic is crucial. Bitcoin and Ethereum traditionally respond to global liquidity conditions. The rise in tech stocks, despite tightening, suggests that the historical correlation between restrictive monetary policy and falling risk assets no longer operates according to usual patterns.
Stock indices mask a more fragile economic reality. Corporate bankruptcies reach levels near fifteen-year highs while payment delays on credit cards and auto loans accumulate. Commercial real estate faces major pressures with growing refinancing difficulties.
This divergence reveals a two-speed market. Tech mega-caps capture most of the gains while sectors exposed to credit and discretionary consumption suffer. This concentration of performance in a few stocks recalls the structure of the crypto market where Bitcoin and Ethereum dominate overall market capitalization.
The parallel with the cryptocurrency market is striking. Just as altcoins generally follow Bitcoin, small-cap stocks follow tech giants. When the latter display stretched valuations despite underlying economic tensions, systemic risk increases for all risk assets.
The Fed finds itself in a delicate position. Lowering rates could further fuel sectoral bubbles, while maintaining a restrictive policy risks triggering a brutal correction in already weakened economic segments.
Kevin Hassett emerges as the favorite to replace Jerome Powell as Fed chair. Known for his accommodative positions, Hassett could adopt a more dovish monetary policy, reviving inflationary expectations. The 10-year Treasury yield is already rising in anticipation of this change.
Investors expect two additional 25 basis point cuts in 2026, likely in March and June. If Hassett takes office as early as February, the dovish pivot could accelerate. This prospect divides analysts. Some see it as a bullish catalyst for risk assets, crypto included, while others fear a return of uncontrolled inflation.
For his part, James Thorne openly criticizes the Fed, calling it an oversized structure constantly lagging behind market developments. Treasury Secretary Scott Bessent shares these concerns, comparing Fed decision-makers to air traffic controllers whose repeated errors would empty planes of passengers.
This loss of Fed credibility complicates market expectations. For crypto traders, uncertainty about future monetary policy creates both opportunities and heightened risks. Volatility should increase across all markets, Bitcoin and Ethereum included, as speculation about the Fed’s direction intensifies.
Accumulate your ETH, BTC and other altcoins on a Ledger wallet at half price. The Black Friday offer ends soon, take advantage here:
Related articles:
Charles Ledoux is a Bitcoin and blockchain technology specialist. A graduate of the Crypto Academy, he has been a Bitcoin miner for over a year. He has written numerous masterclasses to educate newcomers to the industry and has authored over 2,000 articles on cryptocurrency. Now, he aims to share his passion for crypto through his articles for InvestX.
DISCLAIMER
This article is for informational purposes only and should not be considered as investment advice. Trading cryptocurrencies involves risks, and it is important not to invest more than you can afford to lose.
InvestX is not responsible for the quality of the products or services presented on this page and cannot be held liable, directly or indirectly, for any damage or loss caused by the use of any product or service featured in this article. Investments in crypto assets are inherently risky; readers should conduct their own research before taking any action and invest only within their financial means. This article does not constitute investment advice.
Risk Warning : Trading financial instruments and/or cryptocurrencies carries a high level of risk, including the possibility of losing all or part of your investment. It may not be suitable for all investors. Cryptocurrency prices are highly volatile and can be influenced by external factors such as financial, regulatory, or political events. Margin trading increases financial risks.
CFDs (Contracts for Difference) are complex instruments with a high risk of rapid capital loss due to leverage. Between 74% and 89% of retail investor accounts lose money when trading CFDs. You should assess whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Before engaging in financial or cryptocurrency trading, you must be fully informed about the associated risks and fees, carefully evaluate your investment objectives, level of experience, and risk tolerance, and seek professional advice if needed. InvestX.fr and the InvestX application may provide general market commentary, which does not constitute investment advice and should not be interpreted as such. Please consult an independent financial advisor for any investment-related questions. InvestX.fr disclaims any liability for errors, misinvestments, inaccuracies, or omissions and does not guarantee the accuracy or completeness of the information, texts, graphics, links, or other materials provided.
Some of the partners featured on this site may not be regulated in your country. It is your responsibility to verify the compliance of these services with local regulations before using them.
