The Bull Case for Risk-On: Why a Blow-Off Top Is the Base Case
Markets don’t peak on fear or deterioration — they peak when liquidity expectations, market euphoria, and a weakening business cycle converge.
Even as recession fears persist and defensive positioning abounds, global markets have been grinding higher. This paradox – rising markets amid widespread anxiety – is at the heart of the current investment climate. Markets do not typically peak when fear dominates; they peak when euphoria and easy liquidity collide with a weakening business cycle. In other words, major tops form not in times of caution, but when optimism runs rampant even as the economy quietly deteriorates. The core thesis here is that we are approaching such a juncture: a late-stage “blow-off top” rally in risk assets that could mark the cycle’s crescendo. Investors are fearful now, but fearful markets don’t top – euphoric ones do. The ingredients for a final surge are falling into place, even as the foundations begin to crack underneath.
No Reset: The Long Bull Market Since 2009 (Stretched by Stimulus)
It’s important to recognize just how extraordinary the current bull market has been. The secular bull run that began in 2009 has lasted well over a decade without a typical business-cycle reset. There have been corrections and scares (2011, 2015-16, late 2018), but no sustained purging recession. Even the 2020 COVID crash, while severe, was incredibly short-lived – a brief panic met with unprecedented monetary and fiscal stimulus. That intervention postponed the downturn but didn’t truly resolve the excesses; if anything, it inflated asset valuations even further. By 2025, equities, bonds, real estate, and crypto all swelled into what many dubbed “the Everything Bubble.” Yet a true cyclical “clearing event” never occurred. This bull market, running on borrowed time and stimulus, has kept powering higher.
Chart 1: The S&P 500’s extended bull market since 2009, fueled by easy money. Despite occasional jolts (e.g. the 2020 crash), the uptrend never saw a full reset. A final blow-off top toward the ~8,200 area is now on the table as the potential climax of this long cycle.
But no cycle can outrun the business fundamentals indefinitely. Beneath the surface, the economy has been showing signs of late-cycle fatigue. The post-2020 stimulus surge created a “sugar high” of growth that is now fading. Key economic indicators are rolling over. For instance, the labor market – often the last pillar to crack – has markedly cooled. Job creation has slowed from a sprint to a crawl in recent quarters, and several monthly payroll reports even came in near zero or negative. Such sluggish employment growth is highly unusual outside of recessions. In fact, the 12-month average of U.S. nonfarm payroll gains is now at levels that historically preceded recessions, indicating that the expansion’s engine is stalling out.
Chart 2: U.S. job creation has dwindled to a stall. Monthly nonfarm payroll gains (blue line) are hovering around zero, and the 12-month average (red line) has fallen to lows seen just before past recessions (gray shaded areas). This weakening in the labor market signals a late-cycle economy.
Other classic warning signs echo this message. Manufacturing activity peaked and has been contracting; housing and auto sales have softened; banks are tightening lending standards. The yield curve was deeply inverted and has recently started to un-invert – a historical harbinger of recession. In short, the business cycle is on the cusp of turning, even as asset prices have remained buoyant. This dichotomy – booming markets alongside a weakening economy – is exactly what we expect in the final phase of a major cycle. The stage is set for a last burst of market euphoria, a blow-off top, before the tide inevitably turns.
Early Signs of a Final “Melt-Up”
If a blow-off top is indeed brewing, we should find confirming signals in market behavior. And in fact, a variety of indicators across asset classes are aligning with this late-cycle melt-up scenario. From global stock indices to credit conditions to crypto, the stars are aligning for a risk-on frenzy. Let’s look at the key signs:
