Mark Zandi would like to remind you that the stock market is not the economy.
Moody’s top economist has been bearish on his outlook for the US all year, and he sees a disconnect forming between economic realities and a soaring stock market that’s just closed out its best month since 2020. The S&P 500 ended Thursday’s session above 7,200 for the first time ever.
“Technology companies whose stock prices are driven by excitement over artificial intelligence account for almost half of the market’s capitalization,” Zandi wrote in a his latest newsletter. “The AI enthusiasm is operating on its own dynamic, independent of the war and everything else that is happening in the rest of the economy.”
He added that while enthusiasm for AI stocks remains high, it also appears highly speculative, citing the recent example of sneaker maker Allbirds pivoting to an AI company, which sparked a meme-style rally.
However, as Zandi added, the strong stock momentum isn’t just due to the strength of the AI trade. He views it as a reflection of investors’ belief that Donald Trump will step in to boost markets if thing get dicey, an idea that’s come to be known as the “Trump put.”
“The president looks to the stock market as a barometer of how well he is doing and will therefore do whatever is necessary, even ending the U.S.’s military prosecution of the war, to ensure that, if stock prices fall, they will not stay down for long,” he said.
Zandi reupped his prediction that the US is close to a recession, and it the Iran war could be the tipping point.
According to his firm’s model, the odds of a recession starting in the next 12 months remain at what he previously described as an elevated 40%. He attributed this to problems in the labor and housing markets, noting that the economy is vulnerable to other things going wrong.
“The record stock market thus says little about the economy’s performance and prospects, other than that the president will quickly relent on prosecuting the war if it appears to be undermining the economy,” Zandi said.