Risk-On Rotation? Stock Market Sees Historic Rally as BTC Outperforms Gold
A historic day for the U.S. stock market went down this Friday. On this day, the S&P 500 surpassed the 6,800 level for the first time in history.
The index rose another 1% today, driven by banking stocks rising after a softer-than-expected CPI, as well as tech and AI companies, which extended their rally amid strong earnings and continued investor enthusiasm for the sector.
The S&P 500 is now up by over 40% since April of this year. While financial markets faced (and are still facing) periods of uncertainty, U.S. stocks showed incredible resilience throughout the year.
President Donald Trump attributes this success to his tariff policy. While many believed that overly aggressive import taxes would hurt the productivity and consumer sectors, the Republican President begs to differ:
That logic is hard to deny. So far, estimates assert that revenue from Tariffs alone could reach $350 billion per year.
The real question, however, is who is paying the bill. A major concern from the Fed this year is that the tariff costs are often passed down the supply chain, eventually landing on the shoulders of consumers and small businesses.
Today’s CPI report is a testament that, while consumer-level inflation is rising, its growth rate is not accelerating at a pace that alarms policymakers or markets. With that said, concerns of rising inflation for consumer levels remain especially among lower-income households.
Can We Expect a Liquidity Rotation to Crypto?
As for the cryptocurrency market, digital assets have also seen an increase in value on this Friday. Bitcoin passed above $110k once again today, while altcoins like Ethereum, Solana, and XRP averaged a 3% increase in the day. While the liquidity rotation from stocks to crypto is not as clear-cut, there’s an argument to be made that investors are increasingly viewing crypto as a complementary risk asset.
On top of a softer-than-expected inflation, there are also a few other reasons why investors are returning to risky markets.
Widely seen as the sole trigger behind the October 10 market crash, Trump slapping another 100% tariff on Chinese imports, could reach a resolution as soon as next week. At the time, the move culminated in the highest amount of crypto liquidations we’ve ever seen, and erased hundreds of billions off the market.
President Trump and President Xi are expected to meet next Thursday at the Asia-Pacific Economic Cooperation (APEC) summit in South Korea. Trump remains optimistic that the two parties could reach an agreement, and if that were to happen, it would likely boost risk-on sentiment across all financial markets.
The most relevant rotation we’ve seen during this period was from investors closing their positions on risky markets like stocks and crypto, and seeking a safe haven in gold. Gold once again reached record highs in the previous week, reinforcing the idea that gold is functioning as a hedge against volatility.
Bitcoin has outperformed gold over the past two days, which could signal the initial shift that liquidity will rotate back to crypto once things calm down a bit. The total cryptocurrency market capitalization is currently valued at $3.7 trillion. Returning to the October 9 levels would mean an influx of nearly $500 billion into the market.
But, as of right now, this scenario remains overly optimistic. While Bitcoin’s recent outperformance against gold hints at a potential shift in investor sentiment, shrugging off the majority of ‘risk-off’ sentiment would depend on a complete agreement between the U.S. and China, something that may very well not happen next week.
Investors are indeed pricing a potential recovery. But at the same time, the cryptocurrency market remains highly sensitive to macro volatility.
