Why the stock market and the economy seem out of sync

Stock prices rose rapidly in the first half of this year. Meanwhile, economists say the U.S. economic trajectory is more tepid and somewhat out of step with the trajectory of stock prices.

This disconnect may be confusing to consumers and investors who believe that the stock market and the economy mirror each other and move in tandem.

“I think there’s a widespread sense that the two should be aligned,” said Joe Seidle, senior market economist at JPMorgan Private Bank.

“But from a purely analytical point of view, these are two very different phenomena,” Seidl says. “We talk about apples and oranges in different ways.”

Meanwhile, U.S. “real” gross domestic product, a measure of economic output after inflation, has slowed from about 3.3% in 2023 to about 1.9% by 2026, Seidl said.

To be sure, the situation in the US economy is not necessarily bad. Seidl said the pace of growth is “steady.”

But Moody’s chief economist Mark Zandi characterized GDP growth of around 2% as “moderate.” It is said to be almost flat from last year.

“We’re growing. We’re not in a recession,” Zandi said. “But we’re not going anywhere anytime soon.”

In June, Federal Reserve officials estimated that the economy would grow by 2.2% in 2026. Zandi said the consensus among economists largely centers around a 2% growth forecast for this year.

Meanwhile, the labor market is showing weakness, Zandi said. The labor force participation rate is near the lowest level in nearly 50 years, excluding the coronavirus pandemic. Employers are hiring at the slowest pace in more than a decade, excluding the pandemic. The long-term unemployment rate has been steadily increasing.

Additionally, consumer sentiment fell to an all-time low in May due to concerns about rising inflation, according to a University of Michigan consumer survey. Although sentiment improved slightly in June, it said the situation remained “unfavorable.”

Mr. Zandi said that while the stock market and the economy are usually “linked together,” they can sometimes have “quite wide divergences.”

“And this is one of those times,” he said.

Economists say the main reason for this divergence appears to be artificial intelligence.

Zandi said AI companies’ stock prices are “soaring” and energizing the overall stock market.

Technology makes up about 35% of the stock market, and about 50% when you factor in the extended technology group that includes it. alphabet, Amazon, Meta and tesla Although these companies are classified as consumer-facing companies, their transactions are similar to Big Tech, Seidl said.

Stocks are generally traded based on future expectations of a company’s performance. And in the current environment, investors are incredibly bullish on the earnings potential of technology companies, especially in the AI ​​space.

“Earnings growth has been concentrated among large ‘Big Tech’ companies supporting AI infrastructure, particularly semiconductor companies and hyperscalers,” Capital Economics said in a July 1 research note.

like a hyperscaler microsoftAmazon and oracle While providing cloud computing infrastructure, semiconductor companies intelTSMC and Samsung are said to be manufacturing AI chips.

The two companies have accounted for nearly two-thirds of S&P 500 revenue growth since the end of 2022, shortly after OpenAI made the free version of ChatGPT available to the public, the company said.

Meanwhile, technology only accounts for about 10 to 15 percent of the U.S. economy, Seidl said.

Rather, the U.S. economy is supported by consumer spending, which accounts for about 70% of GDP, Seidl said.

Economists say consumer spending remains strong, which is good for the economy, but it is supported by a growing number of high-income households, which could depress the economy if things go sideways.

A Moody’s analysis released in June and authored by Zandi found that the top 20% of households (those with incomes of about $200,000 or more) now account for nearly 60% of personal spending, up from about half in the early 1990s.

After inflation in the first quarter of 2026, spending for the top 20% increased by about 4%, while spending for the bottom 80% remained unchanged, he wrote. This so-called K-shaped dynamic has been going on since the pandemic, he wrote.

Economists say wealthy households own the lion’s share of stocks and tend to spend more freely when markets are booming. This is due to the “wealth effect.” As a result, they feel richer and spend more.

Economists said it could be bad news for the economy if investors grow weary of the AI ​​investment argument and the stock market suffers a prolonged decline, with wealthy people holding back on spending.

There are also pressures beyond AI, such as the possibility of renewed war between the United States and Iran. Inflation is also well above the Fed’s target, putting pressure on household budgets.

“If AI stocks go down sharply, we’re going to be in big trouble because the economy is so weak,” Zandi said. “This is a very vulnerable and dangerous place.”