Bubble fears emerge, as IMF warns UK over triple lock and NHS

There is something funny going on with financial markets this week. It could be because it’s summer, and market participants are too busy on holidays to notice, but on the one hand you have blue chip stock indices making record highs and acting like there are no concerns about US trade tariffs, the meme stock craze is back, gold is lower and Bitcoin is also lower. This is leading to more calls that markets are in a bubble and may be at risk of a correction.

There is no unifying theme across financial markets this month, instead markets are moving to the beat of their own drums. Take blue chip indices, we were told that tariffs would weigh on US stocks, however, that has not been the case so far. Both the S&P 500 and the Nasdaq made fresh record highs this week, although US tariff rates are at multi-decade highs. The recent announcement of a 15% tariff rate agreed with Japan will broaden the tariff burden even more.

America inc. suck up tariff costs, for now

So far, corporate America has shouldered most of the burden of tariffs. For example, General Motors and Nike have absorbed most of their tariff costs, rather than pass them onto consumers. Although goods price inflation has picked up in recent months, the increases have been mild so far. For example, GM said in its earnings report this week that it had paid $1bn in tariffs on some of its imported parts, but it had not dramatically raised its costs for consumers, although it did not rule out future price hikes. Toy maker Hasbro, said that tariffs could knock $60mn off their annual bottom line, which is less than expected. Nike said that it would take a $1bn hit to its bottom line this year, but that price increases for consumers would not come through until later this year.

The average tariff rate for American imports is now 17%, up from 2% last year, so tariffs are having a real economic impact. We are still waiting for clarity on tariff rates for the EU and for some sectors, including pharma, which could push up the average tariff rate even further. Thus, the fact that the main blue-chip indices are at fresh record highs, and are being driven higher by stocks including pharma giant Moderna and Nike, who are two of the top ten performers in the past month, this might cause some discomfort for investors.

Is the meme stock craze over?

The meme stock craze also came back to life in recent weeks, with big gains for GoPro and Krispy Kreme, however, it has lost steam at the end of this week. Go Pro’s shares are down 7% on Friday, and Krispy Kreme is lower by more than 2%. All eyes will be on whether the meme craze is done and dusted, or if other stocks start to move without any obvious fundamental drivers as we move into the last week of July.

Bitcoin loses out as Fed rate cut expectations get scaled back

Bitcoin is down more than $2,500 on Friday and is backing away from record highs. While the broader uptrend may still be intact, Bitcoin has lost momentum and this could be seen as a healthy correction. Demand for bitcoin is waning, as Fed rate cut expectations get scaled back now that chairman Powell is set to remain in his position until the end of his term next May. There are now 1.7 rate cuts expected from the Fed for the rest of this year, down from more than 2 cuts expected at the start of this week. This is also weighing on the gold price.

Bubble signs emerging

The mixed drivers for markets right now are reflected in the factors that are moving US  equity markets. For example, stocks with dividends, growth stocks and equities with the highest market capitalizations have been key drivers for markets right now. The fact that US markets seem to be defying tariff risks, the meme craze is back, and interest rate cut hopes could be dashed, are leading to fears that a bubble could be emerging.

The UK is also in focus. Although the FTSE 100 is outperforming, the pound is coming under intense pressure. GBP is at its lowest level vs. the euro since 2023 and is down by 5.4% YTD. Weak economic growth, and expectations for nearly 2 rate cuts this year are also weighing on the pound, along with weak growth prospects and political issues at home.

IMF questions NHS funding model as it gives latest verdict on UK economy

The IMF gave its most recent update on the UK economy earlier on Friday. It said that the UK’s £9.9bn of fiscal headroom was not enough, but it also warned the Chancellor that she should avoid frequent changes to tax and spend policy. The IMF kept its growth forecast for the UK unchanged at 1.2% for 2025, rising to 1.4% next year. However, it said that risks remain to the downside.

The IMF also said that the government should consider replacing the expensive state pension triple lock, widening the VAT tax base, means-testing more benefits, and charging co-payments to richer users of the NHS . The IMF suggested these measures in the case of an unexpected economic shock, however, the fragile nature of the UK’s public finances, means that some of these measures could come into play sooner rather than later. The question is, do UK politicians have the guts to pull these levers to get the public finances back on track?