Twin water spouts symbolizing U.S. fiscal and trade deficits threatening financial stability in 2025

Twin Deficits and an Overvalued Market: What Retirees Should Know in 2025

July 17, 2025

By: Shayna Fossum Read Time: 10-12 minutes

Imagine standing on a beach, admiring a massive, gleaming structure. From a distance, it looks solid. But when you walk up and tap the foundation, it’s nothing but sand. That’s where we may be financially right now, and most people have no idea.

Markets look strong. The headlines say jobs are solid, consumer spending is up, and the S&P just notched another high. But beneath all that shine is a fragile base made up of twin deficits that most investors tend to overlook: the fiscal deficit and the trade deficit. In the context of today’s overvalued stock market, and with 2025 already shaping up to be a pivotal year, those deficits are harder to ignore.

Individually, each carries weight. Together, they’re a quiet threat with the potential to shake everything investors are counting on. And when you factor in an already stretched stock market… it’s not a matter of if volatility returns, it’s a matter of when.

Part 1: What Are We Really Dealing With?

Let’s start with a quick definition, because clarity matters.

  • A fiscal deficit happens when the U.S. government spends more than it collects in taxes and other revenue. It makes up the shortfall by issuing debt (i.e., selling Treasury bonds).
  • A trade deficit means we import more than we export. More goods and services come into the U.S. than go out. Foreign capital fills that gap by buying U.S. assets.

These are not uncommon on their own. But when they run side by side, something economists call a twin deficit, it can create a dangerous dependency.

Right now, we have both running at scale.

  • As of July 2025, the Congressional Budget Office (CBO) projects the federal deficit at $1.9 trillion for the fiscal year, nearly 7% of GDP.
  • According to the U.S. Bureau of Economic Analysis (BEA), the trade deficit in goods and services continues to hover above $60 billion per month, or around 3% of GDP annually.

When you zoom out, these numbers show that we’re spending more than we’re earning, both as a government and as a nation.

Part 2: The Fiscal Deficit:  Spending Like There’s No Ceiling

Let’s unpack what a fiscal deficit means for investors, especially retirees.

Rising National Debt
Every time the government runs a deficit, it issues more debt. The government must pay interest on that debt. In 2023 alone, the U.S. spent $659 billion on interest payments, more than it spent on defense. That number will only grow if interest rates remain elevated.

Reduced Flexibility in a Crisis
Large deficits limit how much firepower the government has during the next recession. We can’t keep printing and borrowing endlessly without market consequences.

Inflation Fuel
Stimulus spending without matching productivity gains drives prices higher. If deficits remain unchecked, the Federal Reserve may be forced to keep interest rates high, possibly longer than markets are currently pricing in.

Part 3: The Trade Deficit:  Selling the Farm to Keep the Lights On

A trade deficit isn’t inherently bad. But like anything else, context matters.

In theory, it simply means Americans buy more from abroad than they sell. But to fund that imbalance, foreigners have to buy U.S. assets:  stocks, real estate, bonds, or entire companies.

Dependence on Foreign Capital
The U.S. is trading away ownership of long-term assets in exchange for short-term consumption. That’s fine until sentiment shifts.

Propping Up Markets
Foreign capital may be artificially inflating U.S. market prices. In many cases, stocks rise not due to strong earnings, but because surplus capital needs a home.

Loss of Economic Sovereignty
Over time, foreign investors owning larger stakes in U.S. infrastructure, debt, or companies can reduce our ability to manage economic outcomes independently.

Part 4: The Twin Deficit Problem:  Fuel on Both Ends

When you run both deficits at the same time, it creates a fragile flywheel.

  • The fiscal deficit pushes up demand through spending.
  • The trade deficit pulls in foreign money to fund that demand.

But here’s the catch: if foreign investors pull back, the flywheel breaks, and markets may respond sharply.

Think about it this way: foreign investors act like co-signers on America’s financial engine. If they step away, borrowing becomes more expensive, markets wobble, and the dollar loses strength.

We saw hints of this in 2022, when the dollar weakened and yields spiked following massive spending and ballooning debt ceiling negotiations. The warning signs are not new; they’re just getting louder.

Part 5: So, What Does This Mean for the Stock Market?

The U.S. stock market is widely considered overvalued by historical standards.

As of mid-2025:

The Shiller CAPE ratio (a cyclically adjusted price-to-earnings measure) is hovering around 32—nearly double its long-term average of 17.


The Buffett Indicator (which compares the total market cap of U.S. stocks to GDP) just crossed 210%—a level that signals extreme overvaluation.

According to Advisor Perspectives, the Buffett Indicator surpassed 210% in July 2025—its highest reading ever. Both Nasdaq and The Motley Fool echoed the warning: at this level, investors are “playing with fire.”


Many investors still underestimate how twin deficits contribute to an overvalued stock market in 2025.
At these levels, the market isn’t just optimistic—it’s assuming everything will go right. No policy missteps. No inflation surprises. No slowdown in earnings. And when reality falls short of that perfection? That’s when sharp corrections hit hardest.

And those record-high valuations? They’re not just happening in a vacuum. They’re being fueled by something deeper—the twin deficits.

Artificial Liquidity Drives Prices Higher

Government spending and foreign capital are fueling asset prices. But unlike company profits or innovation, this fuel is external. It’s not grounded in long-term value.

When the fuel runs out or investors question its sustainability, prices don’t drift, they drop, especially when valuations are already inflated.

The Setup for a Sharp Correction

In a normal market, corrections can be healthy. But in an overextended market backed by borrowed money, the fall can be more abrupt.

A resurgence in inflation could force the Fed to tighten policy further. If foreign investors grow cautious, they may stop rolling over Treasuries or begin reallocating assets. Either could cause yields to spike, which historically puts downward pressure on equities.

Valuation Compression

Higher interest rates don’t just hurt bondholders. They force investors to reprice risk. In simple terms, they demand more return for taking risks, which means lower P/E multiples.

So even if company earnings remain steady, stocks can fall just because investors are no longer willing to pay 30x earnings when 5% Treasury yields are available with less risk.

Part 6: How It Plays Out for Real Investors

Whether you’re already retired, nearing retirement, or managing a large portfolio, this combination, twin deficits + overvalued markets, has three real-world implications:

Volatility will likely return with more force and less warning.

Markets driven by artificial liquidity tend to unravel suddenly. There’s no “Fed put” waiting if inflation is sticky and foreign buyers slow down.

Traditional diversification may not protect you like it used to.

If both stocks and bonds get repriced at once, investors relying on a 60/40 strategy may face losses in both stocks and bonds.

Income and preservation strategies need to be re-evaluated.

Investors depending on portfolio withdrawals or yield need to be especially thoughtful about sequence of returns, principal protection, and real (after-inflation) returns.

Part 7: What Can Be Done?

We can’t control what Congress spends or what other countries buy, but we can take steps to protect and position ourselves wisely.

Here’s where the conversation turns from macroeconomics to personal application.

Get Clear on Risk Exposure

If your portfolio is heavily weighted toward growth or momentum stocks, now may be the time to stress-test those allocations.

Diversify Beyond Traditional Assets

This doesn’t mean running to cash. But it may mean looking at options with built-in buffers, income layers, or contractual guarantees that aren’t tied to Wall Street’s mood swings.

Think in Terms of Structure, Not Performance

Most portfolios aren’t broken because of performance; they’re broken because the structure didn’t match the investor’s real vision, needs, or risk tolerance.

Revisit Your Withdrawal Plan

If you’re retired or approaching retirement, your withdrawal strategy is more important than your investment return. Sequence risk, taxes, and inflation are more dangerous than volatility.

Final Thoughts: Leading vs. Reacting

The U.S. economy is resilient. But resilience doesn’t mean invincible. And markets don’t go up forever just because they’ve been doing so.

Institutional investors and foreign governments are already adjusting their portfolios behind the scenes. They see the writing on the wall.

When you see twin deficits and a historically overvalued stock market colliding in 2025, it’s time to check your strategy. If your plan is built on the assumption that markets will keep floating higher on borrowed money, artificially low interest rates, and endless foreign capital… that’s not a plan. That’s a hope.

Hope has its place, but not in financial strategy.

Want to talk through what this might mean for your strategy?
There’s no one-size-fits-all approach, but there is such a thing as a mismatched strategy for today’s reality. If you’ve felt a bit uneasy about how everything is connected right now, you’re not wrong. Let’s sit down and map it out, (478) 200-5175

Want to dive deeper into how your income structure may need to adapt?

Read: Embracing Change—A New Financial Chapter in Retirement

Sources:

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