U.S. Money Supply Just Made History in More Ways Than One -- and It's Sending an Ominous Warning to Wall Street

For the better part of the last three years, the bulls have been in control on Wall Street.

Despite a tariff-induced "hiccup" for the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC) in early April of last year, these widely followed indexes ended 2025 higher by 13%, 16%, and 20%, respectively, with all three hitting several record-closing highs. It was the third consecutive year with gains of at least 16% for the S&P 500, marking only the third time that's happened since the late 1920s.

However, this overwhelming optimism, spurred by the rise of artificial intelligence and the expectation of future interest rate cuts, may not be sustainable. While there are always data points that portend trouble for the stock market, they don't always come from where you'd expect.

Image source: Getty Images.

U.S. money supply is making history in more ways than one

For example, most investors have historically not paid much attention to U.S. money supply since it expands over time with little interruption. But every so often, this monthly reported data point can paint quite a picture.

Though there are several measures of money supply, M1 and M2 are typically the most noteworthy. The former takes into account cash and coins in circulation, along with demand deposits in checking accounts. Think of M1 as money you can access and spend right now.

Meanwhile, M2 money supply is the aggregation of everything in M1, plus money market accounts, savings accounts, and certificates of deposit (CDs) below $100,000. This is still money you can spend, but it generally takes more effort to get into your hands. It's this money supply measure (M2) that's making history in more ways than one and sending a potentially ominous warning to Wall Street.

On the one hand, M2 money supply hit a fresh all-time high of $22.411 trillion in December 2025, based on the latest monthly data from the Board of Governors of the Federal Reserve. A growing economy needs more capital in circulation to facilitate transactions, so a steady climb in M2 is traditionally viewed as a positive for an existing bull market. M2 has bounced back in a big way from the largest decline observed since the Great Depression from April 2022 to October 2023.

However, M2's expansion hasn't been able to keep pace with Wall Street's tech-fueled rally -- and that's a problem.

⚠️HOLY COW:

The US stock market cap to US M2 Money Supply ratio hit a record 306%.

This now officially surpasses the 2000 Dot-Com Bubble peak.

The percentage has nearly DOUBLED since the 2022 bear market.

In other words, the total value of all US stocks is now over 3× larger... pic.twitter.com/wufNhV4w8a

-- Global Markets Investor (@GlobalMktObserv) January 5, 2026

Keeping in mind that all valuation tools are inherently subjective, a time-tested value-measuring yardstick that's been back-tested to January 1971 is foreshadowing heightened volatility and the probability of a significant pullback in stocks. This measure is the market cap-to-M2 money supply ratio.

Historically, the cumulative value of all publicly traded U.S. stocks divided by M2 money supply has hovered between 100% and 200%. In other words, the market cap of all stocks has equaled or exceeded M2, in some cases by twice as much.

Recently, the market cap-to-M2 money supply ratio hit an all-time high of 306%. To put this figure into perspective, it's in the neighborhood of double the 55-year average and has officially surpassed the 303% reading prior to the bursting of the dot-com bubble, making this the most expensive stock market in history.

Every time the market cap-to-M2 money supply ratio has surpassed 200% during a continuous bull market rally since the late 1990s, we've observed peak-to-trough declines in the Dow Jones Industrial Average, S&P 500, and/or Nasdaq Composite ranging from 20% to as much as 78%. In short, this historic reading suggests that heightened volatility (and downside) is forthcoming for the stock market.

Image source: Getty Images.

Historical correlations work in both directions

Although the market cap-to-M2 money supply ratio gives investors reason for pause, it's worth noting that historical correlations for the stock market work in both directions -- and typically, there are far more reasons for investors to be optimistic than pessimistic about the future.

Make no mistake about it, stock market corrections, bear markets, and those pesky elevator-down moves on Wall Street can tug on investors' heartstrings. Most of us don't enjoy seeing sizable red arrows in our portfolios, but it's the price of admission to the greatest wealth creator on the planet.

What's important to recognize is that corrections, bear markets, and crashes for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are relatively short-lived. The same can't be said for bull markets, which are known to stick around considerably longer.

In June 2023, shortly after the benchmark S&P 500 was confirmed to be in a new bull market after climbing 20% from its 2022 bear market low, analysts at Bespoke Investment Group published a data set on X (formerly Twitter) comparing the length of every S&P 500 bull and bear market since the beginning of the Great Depression (September 1929).

It's official. A new bull market is confirmed.

The S&P 500 is now up 20% from its 10/12/22 closing low. The prior bear market saw the index fall 25.4% over 282 days.

Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp

-- Bespoke (@bespokeinvest) June 8, 2023

In the more than 93 years analyzed by Bespoke, analysts found the average S&P 500 bear market lasted just 286 calendar days, or roughly 9.5 months. What's more, only eight out of 27 bear markets reached the one-year mark, with none surpassing 630 calendar days.

At the other end of the spectrum, the typical bull market endured approximately 3.5 times longer (1,011 calendar days), with 14 out of 27 bull markets, including the current one when extrapolated to the present day, lasting longer than 630 calendar days.

No matter how dire the economic data may appear, wagering on high-quality stocks to appreciate over the long term has been a winning recipe for investors spanning more than a century. Despite a historic bifurcation between the cumulative market cap of U.S. stocks and M2 money supply, the long-term outlook for equities remains as optimistic as ever.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.