Investors were bracing for turbulence on Wall Street as the US government shutdown delayed key economic reports. Yet, defying expectations, the stock market surged on Friday, with both the S&P 500 and the Dow Jones Industrial Average hitting record highs.The rally isn’t just driven by Big Tech. Though companies like Nvidia, riding the AI boom, are still performing strongly, gains are widespread across the US stock market, according to AP. Smaller companies are also thriving: the Russell 2000 index has hit a record after taking nearly four years to recover its previous peak. Gold has reached new highs, and the most popular US bond fund is on track for its strongest year in at least five.Historically, shutdowns have had little impact on markets or the broader economy, and investors expect a similar outcome this time. Many professional investors believe the market could continue to rise, even after a 35% increase since April.But if the shutdown is not hitting the market, what may impact it?Stocks get costlier!Despite the optimism, some experts worry that stocks are getting expensive. Though stock prices follow the company’s profit, lately they have surged much faster than corporate profits, and the S&P 500 is now close to its priciest level since the 2000 dot-com bubble, according to the Shiller price-to-earnings ratio, which measures valuations over the past decade.Ann Miletti, head of equity investments at Allspring Global Investments, says she’s concerned about speculative stocks, especially smaller, unprofitable companies. “It’s these little bubbles that are concerning to me. When you see things like this, it’s generally not a good thing,” she said, though she remained relatively optimistic about 2026.It is worth noting that indicators of an overvalued market are notoriously unreliable in predicting downturns. Stocks can remain pricey for some time as long as investors are willing to pay the premium, AP reported.

What to look for

Corporate profitsLooking ahead, the upcoming earnings season will be closely watched. PepsiCo and Delta Air Lines will release results on Thursday, followed by major banks like JPMorgan Chase. Analysts expect the S&P 500 to report an 8% growth in earnings per share compared with last year, with companies needing to show continued growth through 2025 and into 2026 despite inflation, tariffs, and economic uncertainty.Interest rate cutsAnother factor behind the rally is the expectation of interest rate cuts by the Federal Reserve. Lower rates make borrowing cheaper for businesses and households, boost spending, and make investors willing to pay more for stocks and bonds.Traders expect at least three more rate cuts by mid-next year, with Fed officials signalling a possible easing as the job market slows. But Chair Jerome Powell has warned that the Fed may adjust plans if inflation, which remains above the 2% target, persists.“I feel like interest rates and expectations of what the Fed is going to do are driving everything right now,” said Miletti. “If the Fed doesn’t cut as much as people are expecting, any of these areas that look a little speculative, because they’re not based on fundamentals, those areas will have some real problems.”AI optimismYung-Yu Ma, chief investment strategist at PNC Asset Management Group, calls AI “the question of the decade.” He believes AI-related stocks are fairly valued as long as the sector continues strong growth and sales, as cited by AP.The AI boom is also helping to ease concerns about long-term interest rates and inflation. But for the benefits to last, AI must improve productivity enough to counter the rising debt levels in the US and globally.“If we do achieve these benefits for companies and for people’s lives, everything can go well for years,” said Ma. “I think everyone is tying their fortunes to that ship, whether they realize it or not.”