Is your wallet at risk?

Your investment portfolio may be more at risk than this year’s market rally may seem. Investors are piling into stocks despite relatively high interest rates, a slowing economy, and concerns about the potential emergence of an AI bubble. Wall Street calls it a “hot run” trade, and it is pushing the S&P 500 Index, a broad measure of the stock market, to record levels.

If the market is trending towards the metal, what’s not to like? If inflation rebounds or corporate profits falter, your 401(k) could take a hard hit before you have time to react. Here’s what you need to know about this high-risk bet, and how to protect yourself.

What is a “Run It Hot” trade?

A “run” trade describes a strategy where investors remain fully invested, especially in stocks, amid high rates and still high inflation, assuming the economy can handle the stress. Essentially, it’s a rejection of recession fears. Instead of turning to bonds or defensive assets, such as company stocks that tend to do well during recessions, retail investors are doubling down on growth-oriented sectors such as technology, industrials and energy.

According to JPMorgan’s mid-year 2025 forecast, long-term Treasury yields remain stable at around 4.35%, reflecting confidence that inflation will cool without causing growth to collapse. Demand for growth assets (such as AI stocks) has rebounded with a view that the Fed may not need to tighten policy further, although that view is being tested as inflation rises to a level well above the Fed’s official target of 2%.

Why are investors all in?

Going into this month, corporate earnings have topped expectations for five straight quarters, even as interest rates have recently begun to decline. Companies like Coca-Cola (KO), IBM (IBM), and major banks have all exceeded expectations. For many traders, this is evidence that the US economy can handle the pressure.

Psychology is also driving much of this momentum. After years of market turmoil, investors have realized that sell-offs rarely last. The market’s decline has reversed every time in recent years, rewarding those who “bought the dip” as the market bounces back higher.

Optimism about future AI profits has fueled a stock market boom. Tech giants are pouring unprecedented amounts of money into AI infrastructure. The massive capital spending on data centers and AI chips is unlike anything seen since the tech boom of the late 1990s, convincing investors that this isn’t just hype — companies are betting billions that AI will transform productivity and profits for years to come.

Simply put, investors see the economy accelerating, not crashing, making a “run fast” bet seem like a better deal than potentially missing out on further gains.

Hidden dangers

With inflation reaching 3% last month in the latest Bureau of Labor Statistics report, the Federal Reserve may need to rethink its policy of easing interest rates. Meanwhile, the unemployment rate is 4.3%, and is rising to its highest levels since 2021. Hiring has essentially been frozen, with the rate in August reaching the lowest level since 2013, and companies announcing 71% fewer hiring plans in September than they had a year earlier.

The tariff regime and trade tensions add another layer of risk. The tariffs have already disrupted supply chains and raised costs for manufacturers and retailers. If the Trump administration escalates trade conflicts further, corporate profit margins could shrink quickly — especially for companies that rely on global supply chains or international sales.

Additionally, the stock market is trading near record highs, giving you little room for error. If strong growth pushes inflation above 3%, the Fed could resume raising interest rates amid further weakness in the labor market. This is a nightmare scenario, and your wallet could be caught in the crossfire before you see it coming.

How to protect your investment portfolio

If you’re concerned, here’s how to reduce the risk of “running hot”:

• Diversification across defensive sectors: You can add utilities, consumer staples, and health care — companies with consistent earnings that tend to hold up when growth slows.
• Maintain exposure to technology, but don’t overdo it: AI spending is still strong, but don’t bet your entire portfolio on it.
• Build your bond positions: If the labor market experiences turbulence, Treasury yields may fall and bond prices rise, mitigating losses.

The goal is not to time the market perfectly, but to make sure you can weather a correction without panicking or having to sell at the worst possible moment.