The market often fails to price in the full effect of deregulation immediately. Policy changes can take a year or more to translate into improved corporate earnings. This creates a potential opportunity as the market is likely to re-rate these companies only after the financial benefits become visible.

A major regime change is underway to "reprivatize the financial system." This involves shrinking the Fed's footprint and loosening bank regulations to compel commercial banks to step back into their pre-GFC role as the primary creators of credit and market liquidity, reducing reliance on the central bank.

Despite tight spreads signaling caution, the current market is not yet cracking. Parallels to 1997-98 and 2005—periods with similar capex, M&A, and interest rates—suggest a stimulative backdrop and a major tech investment cycle (AI) will fuel more corporate aggression before the cycle ultimately ends.

The US financial system evolved through three phases: System 1 (1933-1999) separated commercial and investment banking, System 2 (2000-2008) deregulated and led to the GFC, and System 3 (post-2010) established new guardrails, spawning the private capital boom.

Unlike past crises, the Federal Reserve is unlikely to provide the next wave of market liquidity via its balance sheet. With rates far above zero, its primary tool is rate cuts. Instead, any new liquidity will likely originate from commercial banks, which are being deliberately deregulated to encourage credit creation.

The market is focusing on individual positives like earnings growth and Fed easing, but the real story is the reinforcing interplay between deregulation, operating leverage, and accommodative monetary and fiscal policy. This collective impact is being underestimated by investors.

The U.S. is experiencing a rare combination of easing monetary, fiscal, and regulatory policies at the same time. This trifecta of support, typically reserved for dire economic conditions, is creating a favorable environment where markets can run hot and valuations may overshoot their typical levels.

The trillions needed for the AI revolution exceed government capacity. The next economic phase will shift from central bank quantitative easing to unleashing commercial bank balance sheets. Regulatory changes, like adjusting the SLR, will enable banks to provide the necessary leverage, echoing the Greenspan-era 90s boom.

While often overlooked, easing regulatory policy is a powerful stimulus. The finalization of key capital rules is expected to free up approximately $5.8 trillion in balance sheet capacity for globally important banks, a significant but opaque driver of market liquidity that is separate from monetary or fiscal actions.