World 'dangerously dependent' on US stock market, former IMF economist Gita Gopinath warns

The world has become “dangerously dependent” on the American stock market, and a correction could trigger global economic fallout far worse than the dotcom crash, former IMF chief economist Gita Gopinath has warned.

In an opinion piece published in The Economist, Gopinath argues that both US and international investors have become deeply exposed to American equities – particularly the surging technology sector – leaving the global economy vulnerable to a sharp downturn in US asset prices.

“The scale of exposure today is far larger and more interconnected than in 2000,” she wrote. “A correction in American markets would reverberate worldwide.”

Rally and risk

US stock markets are trading near record highs, buoyed by enthusiasm for artificial intelligence and technology-led productivity gains. Gopinath draws parallels with the exuberance that preceded the dotcom bubble, warning that the current rally could be setting the stage for a painful correction.

American households have significantly expanded their stock holdings, while foreign investors-especially in Europe-have funneled capital into US equities, benefiting from the dollar’s strength. This deepening interdependence means “any sharp American market downturn will echo across the world,” she said.

Trillions at stake

Gopinath estimates that a market correction comparable in scale to the early 2000s crash could erase over $20 trillion in US household wealth, equivalent to around 70% of US GDP in 2024. The result, she warns, would be a severe hit to consumer spending and a potential two-percentage-point drag on US GDP growth.

The global spillover would be similarly severe. Foreign investors could face losses exceeding $15 trillion, roughly 20% of the rest of the world’s GDP, far surpassing the foreign losses during the dotcom crash, which amounted to less than 10% of global output at the time.

“This stark increase in spillovers underscores how dependent the world has become on the performance of American markets,” Gopinath noted.

Limited policy room

Unlike in previous crises, the world’s ability to respond is constrained. Gopinath points to record government debt, trade tensions, and geopolitical uncertainty as factors limiting fiscal space.

“High debt levels and political gridlock mean that fiscal stimulus will be far more limited than in the past,” she wrote.

The dollar, traditionally a “flight to safety” asset, may also be less reliable. Gopinath observes that the dollar has weakened even amid domestic policy expansion, reflecting growing investor unease and hedging against US currency risk.

“Eroding confidence in American institutions, including the Federal Reserve, could weaken the dollar’s stabilizing role,” she warned.

Fragile foundations

Gopinath attributes the underlying fragility to “unbalanced growth,” with innovation and productivity gains heavily concentrated in the United States. That concentration, she says, has left asset prices and global capital flows resting on a narrow base.

To reduce systemic risk, she calls for stronger and more balanced growth outside the US “If Europe deepens integration and emerging markets sustain credible growth, global capital could diversify,” she wrote.

A more perilous landscape

Gopinath concludes that the structural vulnerabilities today make the global economy more fragile than it was two decades ago.

“A market crash now would not lead to the brief, mild downturn we saw after the dotcom bust,” she wrote. “There is far more wealth at risk – and far less policy space to soften the blow.”