Investor’s Corner: A rising liquidity tide lifts all markets

 

Global liquidity is the stream of cash and credit flowing through the financial system – think of it as oxygen for a debt-based global economy. Economists track this through aggregated M2 money supply, which includes currencies and bank deposits across major economies. At nearly US$96 trillion today, it's one of the most powerful forces shaping markets, and it’s only growing bigger.

During the pandemic crisis in 2020, for example, a burst of stimulus helped cushion economies against a massive slump. Another wave came in 2024, offsetting the impact of higher interest rates. That’s probably a big reason why the economy has chugged along over the past couple of years and avoided a recession: liquidity has kept flowing despite rising rates.

The nuclear option

 

This Stock Rally Is Different 2025

 

Investors will likely need to look beyond the concentrated group of stocks that drove the market higher in recent years as benchmark returns become more modest and stock-picking opportunities emerge across a more diverse set of regions, sectors, and styles, according to Peter Oppenheimer, chief global equity strategist in Goldman Sachs Research. Equity markets face headwinds that weren’t present during past structural bull markets. These include elevated valuations, higher interest rates and inflation, slower expansion of world trade, sluggish economic growth, and rising demands on government spending.  Taken together, these factors mean that absolute returns are likely to be lower than during other sustained market rallies. But Oppenheimer says there could be opportunities for investors to outperform the broader stock market: Equity investors may benefit from diversification, both within the technology sector and across different industries. As global trade declines, investors may benefit from a focus on countries and companies that can specialize and dominate in their export markets, especially in services. Higher trade restrictions, a weaker dollar, and increased fiscal support and localization efforts may also create investment opportunities in domestically focused companies with strong market positions. In Europe, a renewed emphasis on strategic industries and self-reliance is expected to drive investment, potentially improving margins and returns in certain key sectors.