Robert Bush
Carter Johnson
The US equity market has expanded from approximately $27 trillion in 2016 to more than $78 trillion in 2026, growing faster than federal debt and potentially helping markets absorb rising government borrowing.
- US stocks now have a market capitalisation approximately 1.5 times the size of the outstanding US bond market, compared with a smaller market capitalisation than bonds as recently as 2022.
- Resilient corporate earnings and widespread equity ownership may help explain why higher borrowing costs have not translated into greater financial market stress.
The rapid expansion of the US equity market may help explain why rising government debt has not caused greater financial stress. With US public equities now worth more than $78 trillion and exceeding the value of the outstanding US bond market, investors have access to an increasingly large and liquid pool of assets alongside Treasuries. This expansion in private-sector wealth may be one factor helping financial markets withstand the pressures associated with rising government borrowing and higher interest rates.
The ways in which higher bond yields can weigh on equities are well understood. A higher cost of capital increases the discount rate applied to future cash flows, weighing most heavily on long-duration assets and growth-oriented companies. It also raises the opportunity cost of investment, forcing investors and management teams alike to become more selective about how capital is deployed.
Stock and awe
Yet focusing exclusively on these headwinds risks overlooking how much the composition of US financial markets has changed. Today's stock market bears little resemblance to that of a decade ago. The market capitalisation of US public equities has risen from roughly $27 trillion in 2016 to more than $78 trillion today, according to SIFMA figures. As a share of GDP, the US equity market has expanded from approximately 136% to more than 200%, while gross federal debt has risen from around 100% of GDP to roughly 125%.
As recently as 2022, the market capitalisation of US stocks was slightly less than the entire universe of outstanding US bonds (encompassing Treasuries, corporate bonds, agencies, municipals and commercial paper), SIFMA data show. For much of the 2010s, that also held true as ultra-low interest rates catalysed fresh activity in the public bond markets while the stock market grew at a comparatively slower pace. Today, however, the stock market is 1.5 times the size of the entire bond market.
The composition of US capital markets has shifted over time
The implication is important. While the Treasury market remains the world's largest and most liquid destination for capital, investors now have access to an alternative pool of assets that has grown even faster than government liabilities themselves. The market value of US public equities has expanded alongside Washington's liabilities. That may help explain why rising debt issuance and higher yields have so far produced less pronounced financial-market stress than some observers anticipated. Rather than overwhelming the system, government borrowing has occurred alongside an extraordinary expansion in private-sector wealth.
Everyone owns equities
Widespread household participation in the US equity market may help mitigate some of the economic effects of higher interest rates by distributing financial market exposure across a broader investor base. The United States has one of the highest rates of household stock market participation in the world, with millions of households invested either directly or through retirement accounts. Counterintuitively, that may make the economy more resilient to higher interest rates. New research from the Federal Reserve Bank of New York suggests that widespread stock ownership can help diffuse the effects of tighter financial conditions across a broader set of households, potentially mitigating subsequent impacts on consumer spending, asset valuations, and, ultimately, corporate investment.
Proportion of US household financial assets held in equities
Stocks as shock absorbers
Viewed through that lens, equities may be serving an underappreciated role in today's financial system. Rather than simply being victims of higher rates, they may also act as shock absorbers. The expansion of the US equity market may provide investors with greater flexibility in allocating capital, potentially helping to offset some of the financial pressures associated with rising government borrowing. However, the extent to which equity market growth directly mitigates stress in Treasury markets remains difficult to quantify.
Of course, the factors underpinning the rise in equity market capitalisation matter as well. Higher valuations can increase the market value of equities, but sustained earnings growth may provide a more durable foundation. The data suggest that US equity returns in 2026 have been driven primarily by earnings growth rather than multiple expansion. The data here suggest that in 2026, the total returns of US stocks have been driven not by rising multiples but by greater earnings.
Earnings matter
Analysis using FTSE Russell and LSEG data indicates that US corporate earnings growth has been an important contributor to equity market performance in 2026, highlighting the role of corporate fundamentals in supporting valuations despite higher borrowing costs. In the third quarter, earnings estimates generally held up or improved despite a macro backdrop of rising yields, sticky inflation concerns and higher real borrowing costs. This earnings resilience may reflect a relatively supportive economic environment.
The question for investors may therefore be not simply whether government debt can continue to rise, but whether equity market growth and resilient corporate earnings can continue to offset some of the financial pressures associated with rising borrowing costs.
Earnings growth driving Russell 1000 total returns in 2026
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