Beneath the surface, signs of strain are emerging in both the corporate and consumer sectors, while market sentiment increasingly resembles the euphoric peaks of past bubbles.
The disconnect between market performance and underlying economic fundamentals has become increasingly pronounced, with investors focusing on monetary policy expectations while potentially overlooking deteriorating conditions in key segments of the economy.
This divergence between market optimism and economic reality creates conditions where sudden shifts in sentiment could trigger significant volatility as reality reasserts itself over optimistic projections.
Corporate bankruptcies surge to 15-year highs
Corporate distress is rising at a pace not seen in more than a decade. In the first seven months of 2025, 446 large US companies filed for bankruptcy, the highest year-to-date total in 15 years and already exceeding the full-year counts of 2021 and 2022, when 405 and 373 firms went under respectively.
The breadth of filings across industries signals growing financial pressure, even as headline equity benchmarks continue to climb. This suggests that the benefits of the economic recovery have been unevenly distributed, with many companies unable to adapt to higher borrowing and tariff costs and competitive pressures.
The surge in corporate failures indicates that the higher interest rate environment of recent years has taken a toll on business finances, particularly among companies with weaker balance sheets or those in sectors facing structural headwinds.
These bankruptcy trends could foreshadow broader economic difficulties if the corporate distress spreads to larger companies or systemically important sectors that could affect employment and consumer confidence.
Small businesses also bear the tariff brunt
It is not only large American companies who stand to bear the cost of Donald Trump’s trade war – small US businesses, which account for more than half of the country’s job creation, are also in the firing line.
Figures from the US Chamber of Commerce indicate there are roughly 236,000 small-business importers, defined as firms with fewer than 500 employees. In 2023, these companies purchased more than $868 billion worth of goods from overseas. They now face an estimated $202 billion in annual tariff costs, while also struggling to navigate the complex regulatory requirements tied to the president’s levies – the legality of which remains uncertain amid ongoing court challenges.
The latest White House tariff schedule, with rates ranging from 10% to 50%, has forced many business owners to raise their customs bonds – guarantees purchased from surety providers to ensure the government receives tariff payments, other taxes, and any potential penalties.
Larger corporations typically have the in-house expertise and resources to manage these bureaucratic demands, but for smaller firms the burden is far heavier as they do not tend to have access to the same compliance and forecasting professionals.
Consumer debt reaches unprecedented levels
The consumer, the engine of the US economy, is also showing signs of fatigue. Household debt rose by $185 billion in the second quarter (Q2) to a record $18.39 trillion, up $592 billion from a year earlier.
Mortgage balances surged $131 billion to a record $12.94 trillion, while credit card debt increased by $27 billion to $1.21 trillion, just shy of its all-time high. Student and auto loans each reached new records at $1.64 trillion and $1.66 trillion respectively.