Key Takeaways
- Stock values have hit record highs, while measures of the economy’s health have deteriorated in recent months.
- Experts have identified several reasons the stock market is defying economic gravity, including a weak dollar helping exporters and companies finding ways to deal with President Donald Trump’s tariffs.
- Stock values and economic measures often move in different directions, since stocks only reflect a small aspect of the economy’s overall health.
There’s a massive disconnect between different indicators of the health of the economy: employment and inflation measures are waving red flags, while financial markets are surging, seeing nothing but green.
Indeed, stock markets and economic indicators have been breaking records for entirely different reasons. The popular S&P 500 stock index hit yet another record high this week, the same day the Bureau of Labor Statistics cut its job growth estimates for last year in half, the largest downward revision in the statistical agency’s history.
The S&P 500 has grown more than 11% so far this year. Meanwhile, key economic data points to slowing job growth and stubborn inflation, as many businesses and consumers worry about President Donald Trump’s tariffs hitting their bottom lines.
Here are four potential reasons stocks have shrugged off news of disappearing jobs and rising consumer prices:
Bad News Can Be Good News
On the one hand, the dismal job growth is a bad sign for the health of the economy, but for investors, it has a few upsides.
One is that a stalling job market will likely encourage officials at the Federal Reserve to cut the central bank’s benchmark interest rate despite inflation running above the Fed’s target of a 2% annual rate. Lower interest rates mean cheaper borrowing costs and easier money throughout the economy, and are usually good for stock prices.
Another is that some of the poor job growth could be due to companies using AI instead of hiring workers. If that’s true, it would mean the massive investments in AI technology are starting to pay off—bad news for job seekers, but good for shareholders of AI chip makers and other tech companies.
The Dollar Is Weak
In another case of bad news arguably being good news, the value of the U.S. dollar is down roughly 10% since January, when compared to the currencies of other major economies. To some economists, the falling dollar is a sign that currency traders are losing confidence in the U.S. economy as a whole and see it as riskier than they did before Trump’s tariffs went into effect.
Yet, economists at Goldman Sachs, led by Ronnie Walker, said in a research note that the weak dollar has helped corporate earnings among companies listed on the S&P 500. A weaker dollar helps exporters, whose products become cheaper compared to their competition.
“Companies in the S&P 500 have greater international sales exposure and benefited from dollar depreciation,” Walker wrote.
Major Companies Are Coping With Tariffs
According to the Goldman analysis, companies have stopped discussing “uncertainty” about tariffs affecting their businesses in corporate earnings statements and are moving ahead with strategies to deal with the new import taxes.
“Among companies that discussed mitigation strategies, about three-fourths said they were negotiating with suppliers or adjusting their supply chain, slightly more than half said they were passing through costs to customers, and slightly less than half said they were looking for cost savings elsewhere,” Walker wrote.
Record High Stocks Are Business As Usual
The stock market’s value tends to rise over time, other than in times of severe economic crisis. This means it’s at or near record highs more often than not. Between the end of the Great Recession (2013) and the end of the Covid-related downturn (2021), the S&P 500 closed at a record high on 15% of trading days, according to an analysis by MAI Capital Management.
The Stock Market Is Not The Economy
As many experts have noted over the years, the stock market is not the economy. Measures of “the economy” are intended to gauge the standards of living and well-being of the entire population, whereas the S&P 500 tracks the value of 500 of the country’s 33 million businesses. They can and often do move in different directions.
“It’s essential to remember that the economy and the stock market are not the same thing,” Tiffany Wilding, an economist at PIMCO, wrote in a commentary last month. “That distinction is especially important today, as current policies appear to be widening the gap between the two.”