Even as government operations stall, U.S. equity markets have continued their ascent, with major indices reaching fresh records. The Dow Jones Industrial Average recently surged past previous highs, and the broader S&P 500 along with small-cap stocks have also posted gains. Remarkably, gold and top bond funds are pushing toward record territory too.

Historically, federal shutdowns tend to produce modest disruption in markets, and current market behavior appears to follow that pattern. Investors are essentially wagering that this stall in government won’t upend broader economic momentum.

Still, the exuberance comes with risks. One of the most persistent red flags is valuation. Stocks have rallied much faster than corporate profits, putting indices at valuations last seen during the dot-com era.  Many market watchers view speculative names—especially money-losing smaller firms—as especially vulnerable if sentiment shifts.

Earnings performance in the new reporting season will be pivotal. Analysts expect earnings per share growth of around 8%, but companies will need to demonstrate not only strong past performance but also future guidance that holds up in a volatile environment. In addition, the path of interest rates looms as a central factor. Markets are broadly expecting multiple rate cuts by mid-2026, though Federal Reserve officials have signaled they remain cautious in light of sticky inflation.

Another source of uncertainty is how gains in AI and related sectors will translate into real economic value. The thesis built around accelerating productivity gains depends on whether breakthroughs in AI lead to sustainable revenue growth, not just hype.

If the trends hold and economic data surprises to the upside, the bull run may have room to continue. But if earnings disappoint or the Fed holds firm, markets could see increased volatility or even a pullback. In that context, the coming weeks and months will be a test of how resilient this rally really is.