What Happens When The Wall Of Money Dries Up?

Historically, equity markets rise on optimism but fall on liquidity. Once the marginal stock buyer disappears, liquidity dries up pulling support away from prices. There are now several indications that this may be unfolding: the market remains over-reliant on retail inflows, interest rates are still high, and the U.S. dollar is weakening. This is a challenging environment for equities.

The Retail Wall of Money: Friend or Foe? (Both. Context Matters.)

Since the pandemic lows in 2020, American retail investors have fueled a powerful rally that lifted the S&P 500 and Nasdaq 100 by substantial margins since March 31, 2020. This surge correlates strongly with the massive expansion in the money supply triggered by the government’s pandemic response. The macro story was intuitive: the government and the Fed put trillions of dollars into consumer hands, while the supply of goods remained constrained, so prices rose across the board, from groceries and homes to equities.

From Q1 2020 through April 2021, M2 (a broad measure of liquid money accessible to the public, including cash in hand, checking and savings accounts, etc.) expanded by 43%, reaching $22 trillion. This dramatic expansion sparked CPI inflation, real estate price appreciation, and stock market gains. To combat the inflationary surge, the Fed tightened policy by hiking rates and selling long-term securities (quantitative tightening).

These actions, alongside a normalization in global supply chains, managed to tame inflation without major damage to the economy or job market – an apparent soft landing.

Despite this, the overall money supply remained high in absolute terms, hovering between $20 trillion and $22 trillion. As the Fed paused its hikes in mid-2023 and began easing in Q4 2024, this residual liquidity moved into equities, fueling a rally largely driven by multiple expansion rather than earnings growth.

Retail investors have been the key driver of this dynamic. They currently account for 20–25% of U.S. equity market trading volume, up from under 10% a decade ago. JP Morgan estimates that retail investors added $270 billion in equity flows in the first half of 2025 and may contribute another $360 billion in the second, potentially totaling $650 billion, about 50% higher than 2024.

But that “wall of money” can shift from friend to foe. While inflows may persist, we believe the probability skews toward a pullback. Several structural and cyclical factors point in that direction.

Institutional Money Is Migrating to Other Asset Classes

While retail inflows have surged, institutional investors have quietly moved away. Hedge funds, pension funds, and other asset managers are trimming U.S. equity exposure. Foreign investors, too, have become net sellers of both U.S. equities and Treasuries.

The flow of capital is heading elsewhere. The top-performing equity markets in 2025 are foreign, led by Hong Kong, Germany, and the UK. Even emerging markets – typically vulnerable to rising Treasury yields – have outperformed U.S. indices.

Dollar weakness has likely played a role. The U.S. dollar index is down nearly 10% YTD, with a 13% decline against the euro and 6% against the yen, its worst first-half performance since 1973. Foreign investors, particularly institutional investors with obligations in their domestic currencies like insurers and pension funds, are highly sensitive to currency weaknesses and rapidly shun jurisdictions with uncertain foreign exchange rate outlooks.

Meanwhile, short-term AAA-rated corporate debt yields around 4.5%, while Moody’s all-maturity Aaa bonds yield closer to 5.5%. High-grade fixed income has become meaningfully competitive again. Private credit alternatives offer even higher yields, and real assets like real estate and commodities provide inflation protection.

How’s the Outlook? (Bifurcated. TINA (“There Is No Alternative”) Looks Obsolete)

Our view is that the retail bid alone cannot sustain the market indefinitely. Without a resurgence of institutional and foreign inflows, equities lack durable support. While a bullish scenario exists – faster-than-expected GDP growth, mild effects from immigration policy changes, renewed capital investment from tax policies, and sustained foreign appetite for Treasuries – we believe the odds of all these aligning are low.

The fiscal backdrop is deteriorating. The federal deficit is projected at $2 trillion, with a debt-to-GDP ratio of 120% and annual interest payments nearing $1 trillion. The debt snowball continues as newly issued debt comes at higher yields than the expiring paper it replaces—about $9 trillion in Treasuries roll over annually.

The Fed's control over this environment is limited. The central bank influences short-term rates, but medium and long-term yields (7+ years), which matter more for stock market prices, are set by market forces. Investor confidence in the Treasury’s ability to finance its deficits is now a key factor.

Debt projections are sobering: $40 trillion by 2030 and $52 trillion by 2035, according to the Congressional Budget Office (CBO). That trajectory weakens investor confidence in Treasuries and dampens demand for U.S. dollar assets more broadly. Meanwhile, foreign central banks – who own about 30% of Treasury and agency securities – are reconsidering their need to hold U.S. reserves as U.S. trade policy turns more inward.

In short, the era of “There Is No Alternative” (TINA) to equities is behind us. For nearly two decades, low interest rates and a strong dollar made U.S. equities the unrivaled choice for global investors. That dynamic has shifted. With attractive yields in fixed income, weaker dollar trends, and fiscal stress ahead, we expect institutional allocations to continue migrating away from US equities toward other asset classes.

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