Algenon Cash: How will NC be affected if bubble bursts on overinflated US economy?

By Algenon Cash

The U.S. economy appears robust on the surface: stock markets are at record highs, unemployment is at historic lows and consumer spending remains strong. But beneath this outward prosperity lies a troubling question: Is the U.S. economy dangerously overinflated? When we examine the data, the answer becomes increasingly clear, and the implications for North Carolina’s economy are particularly significant.

One of the most glaring signs of overinflation is the U.S. stock market’s dominance in global valuations. Today, the domestic market accounts for 70 percent of the world’s total stock market valuation — a level not seen since 1998, just before the dot-com bubble burst. While U.S. markets routinely outperform other countries, this level of concentration signals a severe dislocation from global norms.

For North Carolina, a state heavily reliant on financial services, this poses a unique risk. Charlotte, home to major banking institutions such as Bank of America and Truist, is deeply tied to stock market performance. An overinflated market could lead to sharp corrections, potentially destabilizing the financial sector and putting thousands of North Carolina jobs at risk. Furthermore, North Carolina’s growing tech and biotech industries, which have benefited from venture capital and stock market growth, could face significant funding challenges in a downturn.

The stock market’s remarkable rise over the past eight years has not been accompanied by a corresponding boost in corporate fundamentals. The S&P 500’s price-to-earnings (PE) ratio currently sits around 25, significantly above its historical average. These inflated valuations reflect investor optimism rather than sustainable growth, leaving the market vulnerable to sharp corrections.

In North Carolina, corporate profits in sectors such as advanced manufacturing and biotechnology have surged in recent years, partly due to favorable market conditions and government incentives. However, these inflated valuations may mask underlying weaknesses in productivity and innovation. If market corrections occur, these industries could see reduced investment, stalling growth and job creation in areas like the Research Triangle and Greensboro.

Unemployment may be low, but the U.S. economy is still running a federal budget deficit of 6-7 percent of GDP — a level usually reserved for times of recession. This disconnect is unsustainable. Governments typically use periods of economic stability to reduce deficits, yet the U.S. continues to spend heavily, leaving little fiscal room to respond to future crises.

For North Carolina, which receives significant federal funding for infrastructure projects, agriculture and disaster recovery, this poses a critical challenge. Excessive government spending risks leaving the state vulnerable in future economic downturns when federal resources may be constrained. This is particularly concerning for sectors like agriculture, which already face headwinds from rising costs, international trade pressures and potential mass deportations.

Meanwhile, consumers are keeping the economy afloat by spending money they don’t have. Household debt is at an all-time high, with Americans relying on credit cards, auto loans and mortgages to sustain their lifestyles. Rising interest rates are making this debt more expensive to service, creating a ticking time bomb for millions of households.

In North Carolina, consumer debt is a major concern. The state’s housing market, especially in cities like Raleigh, Charlotte and Asheville, has seen rapid price appreciation, leading many families to stretch their budgets. If rising interest rates make mortgages and other loans unaffordable, the state could face a housing market slowdown, with ripple effects on construction, real estate and retail industries.

The warning signs are strikingly similar to previous bubbles. In the late 1990s, overconfidence in the tech sector led to an unsustainable stock market boom, followed by a painful bust. In the mid-2000s, inflated housing prices, coupled with loose lending practices, triggered the Great Recession. Today’s mix of overvalued stocks, soaring debt and reckless government spending suggests that we may be heading down a similar path.

North Carolina is particularly susceptible to these dynamics due to its diverse yet interdependent industries. The financial, real estate and manufacturing sectors — key drivers of the state’s economy — are all closely tied to national economic trends. A bursting economic bubble would likely result in widespread layoffs, reduced state revenue and slower economic growth.

The U.S. economy’s current trajectory is unsustainable, and course correction is urgently needed. Policymakers must focus on reducing deficits during periods of growth, promoting sustainable corporate practices and addressing the root causes of consumer debt. For North Carolina, the focus should be on diversifying its economic base, investing in workforce development and creating policies that encourage long-term stability rather than short-term gains.

Investors in the state should exercise caution, prioritizing value and fundamentals over speculative gains. Industries such as agriculture, manufacturing and biotechnology must prepare for a potential economic slowdown by focusing on innovation and productivity improvements.

The question isn’t whether the U.S. economy is overinflated — it’s how long we can sustain this bubble before it bursts. By acknowledging the risks and making tough choices now, North Carolina can mitigate the impact of a broader economic downturn and build a more stable and resilient future for its residents.

Algenon Cash is a nationally recognized speaker and the managing director of Wharton Gladden & Company, an investment banking firm. Reach him at alc@whartongladden.com