No one is optimistic about the US stock market, but everyone's money is buying in

The market rally at the start of 2026 has been felt by many.

The Shanghai Composite Index rose by 3.76% in January, while the STAR 50 Index surged over 12%. In the entire Shanghai and Shenzhen market, 4.92 million new accounts were opened in January, a year-on-year increase of 213%, marking the second-highest monthly figure in nearly a decade. On the Hong Kong side, the Hang Seng Tech Index jumped 4% in a single day after the New Year, with hundreds of billions of Hong Kong dollars in southbound funds continuing to flow in. Many newcomers entering the market for the first time or those who have just benefited from the big market rally in 2025 are pondering a question:

Can the A-share and Hong Kong stock markets follow the US stock market to achieve a real long-term bull run?

I won’t answer this question today. But I want to break down a more fundamental issue first: how did the long-term bull market in the US stock market come about?

The explanations commonly heard include strong technological innovation, substantial corporate buybacks, and the support of the US dollar’s hegemony. Of course, these are all contributing factors, but they sidestep a deeper issue — even the best companies need continuous buying without selling for their prices to keep rising. So, what force has created 'a constant influx of buyers with extremely scarce sellers' in the US stock market?

I started thinking about this question quite by accident. After arriving in the US, I considered taking a driving test for convenience in daily life and casually asked Gemini how to get a California driver's license. Its immediate response was advising me to avoid it if possible. The reason surprised me: applying for a California driver's license is one of the key references for establishing 'tax residency.' Once recognized as such, any income (including capital gains) earned globally could be taxed by California at up to a 13.3% rate; combined with federal taxes and others,the overall tax rate on long-term capital gains easily exceeds 37%, while short-term gains (selling stocks within a year of purchase) can reach 54%.

A simple action like applying for a driver's license reveals an entire set of tax logic. This prompted me to examine the institutional design of the entire US market: not just taxation, but also pension systems, the operational rules of pension funds, and global capital allocation habits. After reviewing all these, I had a strong realization: the long-term bull market in the US stock market is less about some force driving prices upward, and more about a comprehensive system that systematically generates buying power while locking in selling pressure.

01 Tax bills and pay stubs

The first component of this machine is the tax system. Its function is straightforward: to make the act of 'selling' extraordinarily expensive.

The US capital gains tax is not just one lock but three, each tighter than the last.

First lock: punishment upon selling. Short-term capital gains (on assets held for less than a year) are taxed at ordinary income rates, with a maximum federal rate of 37%. Adding California’s 13.3% state tax and the 3.8% Net Investment Income Tax (NIIT), the combined top rate reaches approximately 54%. What does this mean? For high-income individuals,Out of every 100 dollars earned, 54 dollars are handed over in taxes. Holding for over a year is better, but high-income earners face combined rates including state taxes and NIIT that still hover around 37%.

The second rule: no sale means no tax. If a stock grows from $10,000 to $1 million, as long as it isn’t sold, the IRS considers you haven't made a single penny, meaning unrealized gains are completely untaxed.

The third rule is the most brutal: die and never pay. Heirs reset the cost basis to the market value at the time of the decedent’s death. A stock bought at $1 million at age 40 that's worth $10 million by age 90 has seen $9 million in gains taxed at zero;once inherited by the children, the cost basis automatically resets to $10 million.. Of course, estates exceeding the exemption threshold still face up to a 40% federal estate tax, but the capital gains tax is entirely wiped out. This is the core of America’s wealthy “Buy, Borrow, Die” strategy—borrow against (pledge) stocks while alive, consume, and after death, erase the tax burden without selling a single share.

In September 2025, according to Forbes data, the $4.2 trillion in wealth appreciation held by 905 American billionaires has never triggered a tax obligation, not because their tax avoidance methods are particularly sophisticated, but because this taxation system inherently rewards holding rather than selling. However, simply closing off exits isn’t enough; someone needs to keep injecting liquidity. What serves as the pipeline? The US pension system, which has a clever interplay with the tax code.

The US has two types of investment accounts specifically designed for retirement: 401(k)s and IRAs, one employer-sponsored and the other individually established, covering most salaried workers. If they invest the same amount into these accounts, all transactions within are free from capital gains tax until withdrawal at retirement, when they are taxed at ordinary income rates, which are typically much lower than during their working years.

Under the influence of these rules, each month,tens of millions of American workers’ paychecks automatically execute a 'buy US stocks' order, with most not even aware of what they’ve purchased.

How extensive is this set of rules? As of the third quarter of 2025, total U.S. retirement assets amounted to $48.1 trillion (ICI data, released January 2026). 401(k) plans hold $10 trillion, IRAs hold $18.9 trillion, and together they account for nearly $30 trillion.

The key point is not just the scale but how this money enters the stock market. Contributions to 401(k) plans are automatically deducted from paychecks each month, and once the money enters the account, it is by default invested in target-date funds, which allocate most of the assets to stocks automatically. Fifty-eight percent of 401(k) assets are managed by mutual funds, with $3.4 trillion invested in equity funds. IRAs have a similar structure, with 38% of assets in mutual funds, $4.3 trillion of which is in equity funds.

How do these funds invest the money? Most don't pick individual stocks but buy according to index weights, a strategy known as passive investing. Passive funds now account for nearly 60% of the U.S. fund market. Index funds directly hold about 16%-21% of the total U.S. stock market value, and when including institutional passive strategies, the estimated proportion of passively held assets is around 30%-35% of the U.S. market. Vanguard, BlackRock, and State Street are already among the top three institutional shareholders in 88% of S&P 500 companies.

At this point, we can revisit a widely accepted statement: The U.S. stock market is dominated by institutions, and retail investors are irrelevant. This is only partially true on the surface. If you break down the entire chain, you see that retail investors avoid taxes by putting their money into retirement accounts; those accounts then hand the money over to fund managers, who continuously buy index components based on their weightings.Every link in this chain is driven by the behavioral logic of retail investors.Retail investors haven’t disappeared; they’ve been encoded into a set of automated rules. Their fear of taxes, anxiety about retirement, and even inertia in making investment decisions all drive every part of this chain.

Not to mention, within this well-oiled machine, there’s also participation from global capital.

02 Global passive capital floods in.

The tax rules discussed earlier apply only within the U.S., governing Americans' money but not foreign capital. Foreign institutional investors trading in U.S. stocks typically don’t pay U.S. capital gains taxes, so why don’t they sell? Because what locks them in isn’t U.S. taxes but the regulations of their own countries—pension laws, sovereign wealth fund charters, asset allocation disciplines—all achieving the same effect through different mechanisms.

Consider the latest data: According to the U.S. Treasury's TIC/SHL annual survey, as of mid-2024, foreign investors held $16.9 trillion worth of U.S. equities. By the end of 2025 to early 2026, with continued massive inflows of global capital and market value expansion, this figure will likely have risen significantly.Breaking through the historical threshold of 20 trillion US dollars。

Even more striking is the proportion – according to tracking by Bloomberg and other institutions,Foreign capital now holds about 30% of the US stock market, reaching the highest record since 1945The largest foreign buyers are pension funds and sovereign wealth funds from countries around the world

The Norwegian Government Pension Fund Global (GPFG) is the best example to understand this logic. With assets of 2.23 trillion US dollars at the end of 2025, 71.3% is allocated to stocks, of which about 40% is in US equities, yielding a return of 15.1% in 2025. According to Norwegian law, this money is mainly invested outside Norway (to prevent Dutch disease), and the government only allows withdrawing no more than about 3% of the fund’s market value annually for fiscal spending – 97% of the money remains untouched in the market

Japan’s GPIF is another typical case; based on data disclosed in September 2025, the fund manages 277 trillion yen (about 1.87 trillion US dollars), with assets equally divided into four parts, of which foreign stocks account for 25%, approximately 467 billion US dollars, mostly invested in US equities. The GPIF has been very straightforward: 'Short-term market fluctuations do not affect long-term investment judgment'

The top 100 global asset owners collectively manage over 29.3 trillion US dollars, the majority being pensions and sovereign funds, with about 43% allocated to equities, while the US stock market accounts for more than 60% of global stock market capitalization. Their common characteristic is passive or semi-passive allocation, with investment horizons spanning decades or even generations, almost never selling due to short-term volatility. Similar to the American worker whose 401(k) automatically deducts monthly contributions and defaults to buying index funds, just on a scale several magnitudes larger

Within the US, the tax system locks in selling, while the retirement system automatically buys in; outside the US, pensions and sovereign funds from various countries are bound by their own rules, also being virtually a one-way street of inflowsThese two forces converge into the same pool, forming the engine driving the continuous rise of US stocks

But this system comes at a cost

The most direct cost is borne by ordinary Americans. With 48.1 trillion in retirement assets, the majority of which are allocated to stocks, this means the safety of the entire U.S. retirement system is tied to the stock market's fluctuations: when the market rises, retirement funds grow; when it falls, pensions evaporate. In 2022, the S&P 500 fell by 19%, causing many Americans’ 401(k) balances to shrink by five or even six figures. Many of them are only a few years away from retirement.

And this cost isn't just absorbed within the U.S. From Norwegian fishermen to retired Japanese teachers, people who may have never bought a single U.S. stock still indirectly hold significant amounts of American equities through their national sovereign or pension funds. If there is a systemic decline in U.S. stocks, it won’t just affect Wall Street—ordinary citizens with stakes in sovereign wealth funds around the world would have no choice in the matter.How the money is invested is determined by the rules, not by them.。

However, compared to these issues, a more intriguing question is a structural one: the inherent fragility of the positive feedback loop. More money is institutionally funneled into the U.S. stock market, driving prices up, raising valuations, yet no one sells. High returns attract more passive inflows, further pushing prices higher.

Each step of this cycle is rational, compliant, and automatic.No one is doing anything wrong; but precisely because no one is making judgments, no one is hitting the brakes either.The whole system operates on the premise that 'U.S. stocks will rise in the long term,' and what supports this premise is the continuous injection of funds from the system itself.

This cycle looks perfect when running positively, but once reversed, the subsequent market crash will be as severe as the preceding rally was strong.

03 Conclusion

Looking back at the high valuation of U.S. stocks now, your perspective might be somewhat different.

The P/E ratio of the S&P 500 has consistently been higher than other major markets, with many attributing it to a 'bubble.' But in a market where tax systems discourage selling, retirement schemes ensure automatic monthly buying, and global pensions and sovereign wealth funds continue injecting capital externally, this 'high valuation' is not entirely driven by emotional bubbles—it also has institutional support.

For us Chinese investors, understanding this system holds at least two layers of significance. First, it explains why US stocks are expensive but don’t fall easily: they are backed not just by corporate profits, but also by the credibility of the entire US retirement system and global pension funds. Shorting them requires immense courage. Second, it highlights the cost of this expensiveness: when 48 trillion in retirement funds and over 20 trillion in foreign capital are betting on the premise that 'US stocks cannot fall,' the very notion of 'cannot fall' becomes the biggest risk factor.

Understanding how other systems operate can at least help you assess:When to respect the power of these rules, and when to be wary of their fragility.。 $Nasdaq Composite Index (.IXIC.US)$$SSE Composite Index (000001.SH)$$Hang Seng Index (800000.HK)$

Disclaimer: This article is intended for learning and communication purposes only and does not constitute investment advice.

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