Why Stocks Keep Going up Even as the Economy Softens

The Washington Post

12:25 JST, September 14, 2025

Unemployment is going up, with worker pessimism at its highest in years. Inflation is creeping higher. The U.S. deficit is climbing. Consumer sentiment is down. And many key issues facing the economy – such as the fate of President Donald Trump’s tariffs, and interest rate decisions by the Federal Reserve – are still up in the air.

Despite it all, the U.S. stock market has continued its climb. On Friday, the S&P 500 index closed up more than 12 percent on the year. It sits just shy of a record, having bounced back from the sharp April sell-off when Trump first announced severe tariffs, which were then partially rolled back.

The market’s success has progressed even as other economic fundamentals have softened.

“The stock market is filtering the economic data, and it sees good things going forward,” said Claudia Sahm, chief economist for New Century Advisors. “Households are seeing that same reality and coming down pretty pessimistic.”

Analysts and economists attribute the market’s steady growth in the face of worsening economic data to increased expectations that the Federal Reserve will take a more active approach to stimulating the economy, possibly by lowering interest rates as soon as next week.

The Fed has been leery of cutting interest rates by too much for fear that inflation could surge once again. Inflation has crept slowly upward buoyed by the Trump administration’s tariffs. Policymakers have fought for years to get the annual inflation rate below 2 percent, but the latest data out Thursday shows prices rising at an annual pace of 2.9 percent.

At the same time, the Fed must balance concerns about inflation with its mandate to keep employment stable. Many investors are hopeful that the recent spate of bad labor market news will spur the central bank to cut rates, analysts said. Lower interest rates could decrease borrowing costs across the economy, allowing companies to ease their debt loads and everyday people to receive cheaper loans to finance their homes or other purchases.

Analysts said the last two jobs reports suggest the job market has weakened enough to bring about a rate cut, without indicating a deeper crisis.

“For now the market is really interpreting this data not as recessionary, but as soft data that will give the Fed room to cut rates in a still-growing economy,” said Rob Haworth, senior investment strategy director at U.S. Bank.

Hope for lower rates has boosted sectors that rely heavily on debt, analysts say. Stocks of some home builders including DR Horton and Lennar, for example, saw double-digit increases last month. The Russell 2000 index of small-company stocks, thought to be more sensitive to interest rates, jumped 5 percent in the last month.

The market’s gains are also led by big tech companies, which are benefiting from a wave of optimism around how artificial intelligence could transform the business world.

“The health of the AI theme is more important for stock market performance than the health of the underlying economy, and the AI economy is by all accounts booming,” said Ross Mayfield, investment strategist with Baird Private Wealth Management in Louisville.

Oracle gained 22 percent this week after it announced a $300 billion cloud computing deal with artificial intelligence pioneer OpenAI, making co-founder Larry Ellison the world’s richest person. Palantir, the data firm co-founded by investor Peter Thiel, has quadrupled its stock value in the past year as it carves out a niche helping large organizations revamp their businesses around AI. Microsoft, Alphabet and Nvidia have each gained more than 50 percent since the stock market bottomed out in March.

“So the economic viewpoint is that the industry is shedding jobs, meanwhile the fundamentals of [tech] companies is that they’re just doing a lot more with less, and it’s flowing straight through to their earnings and results,” Mayfield said.

Wedbush Securities’ managing director, Dan Ives, said the prospect of rate cuts should add fuel to the fire, with the current tech-driven bull market spreading to other sectors once the Fed lowers rates. Ives has been an outspoken proponent of investments related to artificial intelligence, which he sees as a new industrial revolution.

“Trillions are going to be spent and tech is at the top of the investor mountain,” Ives said in an email Friday.

Others worry that the optimism could be overblown. Diane Swonk, chief economist at KPMG, said she worries that excessive speculation could play into a bubble in technology stocks.

“We almost always get a bubble with a major technological innovation,” Swonk said.

It’s also possible that the Fed could be more cautious about lowering rates than investors may hope, potentially setting the market up for disappointment.

Investors now widely believe that the Fed will cut rates as many as five times by the end of the year, said Michael Farr of the D.C.-based investment firm Farr, Miller and Washington, even though the central bank itself has given no such assurance. At its June meeting, the Fed penciled in two rate more rate cuts before the end of the year, but the relevant economic data has changed significantly since then.

“The danger for the market is it gets well ahead of what the Fed is actually saying, and stocks that are expensive become stupidly expensive,” Farr said.