Record debt, record markets: navigating the paradox

Summary: While US government debt has soared to new heights, so too have US stock markets. Both the S&P 500 and Nasdaq have recently hit record highs, even as America’s national debt surpasses $36 trillion. At first glance, it may seem contradictory, but this contrast actually offers a valuable insight into how markets operate and where the opportunities may lie.

‍

Understanding the debt situation

US government debt has doubled over the last decade, largely due to pandemic-related spending, tax cuts, and long-standing deficits. But for the most part, America’s rising debt levels are just a case of history repeating itself, given US presidents have usually added to the debt as opposed to reducing it. 

Although the US technically has a debt ceiling, which is a restriction on what it can legally borrow, that debt ceiling has been raised, extended, or revised 78 times since 1960. Often this has taken place without a major consequence to the stock market. 

While the current scale of debt is notable, it’s not an entirely new challenge. Historically, the US economy has kept growing and innovating alongside its rising public borrowing. That resilience is what has made it such a global economic powerhouse. While the long-term sustainability of America’s approach to debt is a valid concern, US markets have shown time and again that strong fundamentals, innovation, and investor confidence can drive performance in the face of government-related pressures.

‍

And what about equities? 

Meanwhile, as debt ramps up, so too does the US market. US stocks have risen after strong employment figures, enduring demand for US-listed companies, and robust earnings reports. According to FactSet, 83% of S&P 500 companies reported higher-than-expected Q2 earnings.

Political developments, like ongoing trade tariffs, will create short-term uncertainty. And the US Federal Reserve left the country’s interest rate unchanged at 4.25% for a fourth consecutive meeting in June 2025, as it awaits more clarity on inflation and economic activity. But the long-term picture remains positive. And markets tend to focus on corporate profitability, consumer demand, and global trends far more than government balance sheets.

To mitigate your risk when investing in the US, you can opt for ETFs or funds which offer better diversification than a single stock. With Freetrade, UK investors can easily gain exposure to US stocks, US ETFs, and professionally managed mutual funds. These broader investments allow you to tap into the momentum of the US economy while maintaining a more diversified and balanced investment approach.

‍

The big picture

Before making any investing decisions pause and focus on long-term strategies proven to build wealth, rather than trying to predict the next market move.

‍

1. Diversify your portfolio

The first half of the year saw a strong pivot towards European investments and other international stocks. Putting all your eggs in one basket, or one country, increases your risk. Adding international exposure can help spread your risk. With Freetrade, you can access a wide range of UK stocks, emerging market ETFs, and other global equities. 

Another way to diversify is with assets like mutual funds, which enable investors to park their cash with a pro fund manager who is paid to try and do better than the market or benchmark they invest in. 

‍

2. Add lower-risk assets for stability

In times of market volatility, fixed-income assets like bonds, gilts, and Treasury bills (or T-bills) can provide stability. But that stability depends on the country and government backing them.

While US T-bills have long been considered among the safest assets globally, recent debates around US debt ceilings and fiscal policy have called their “safe haven” status into question .

Still, short-term US T-bills, maturing in under a year, remain one of the most liquid and widely held instruments in the world. According to the US Treasury Department, holdings of US Treasuries reached $9.05 trillion in March 2025. And their short time to maturity means they're relatively less exposed to long-term fiscal uncertainty.

Freetrade gives you access to UK T-bills, which can serve an important role in a diversified  portfolio. Meanwhile, equities and ETFs that carry more risk are typically better positioned to deliver long-term growth.

‍

3. Stay invested, stay focused

Trying to time the market is rarely a successful strategy. Even if it feels like a market correction could be looming, it’s pretty much impossible to predict the exact moment it will occur. Instead of jumping in and out of the market, maintain a long-term view and stick to your investment plan. 

Recurring orders can help by automating your investing decisions. This can help you ride out short-term ups and downs, which are natural and expected in any market. You’ll also benefit from pound cost averaging (or dollar cost averaging), which spreads your stock purchases over time and helps smooth out price fluctuations.

‍

Source: Annual index returns from Macrotrends as of 25 July 2025. Basis: in local currency terms.

‍

Important information

‍