Meltdown or Mania? Stocks Soar as Economy Tanks!

Stocks Soar as Investors Bet on Fed Rate Cuts Amid Economic Slowdown

In a paradoxical turn of events, the U.S. stock market is thriving even as indicators point towards a weakening economy. Consumer spending is softening, and the job market appears to be losing steam. Yet, investors are celebrating, driving major indices to new heights. What's behind this seemingly contradictory behavior?

The S&P 500 has been on a tear, recently hitting an all-time high for the second consecutive day with a 0.52% rise. While S&P 500 futures are down marginally this morning, premarket, the overall sentiment remains optimistic, suggesting investors aren't anticipating any major downturns.

The key driver of this bullishness lies in the expectation that the Federal Reserve will soon be compelled to cut interest rates. A weaker economy, characterized by sluggish consumer spending and a cooling job market, strengthens the case for monetary easing. And historically, lower interest rates have been a boon for stocks.

Why is this happening?

• Weakening Consumer Spending: Consumer spending decreased by 0.3% month-on-month in May, indicating a potential slowdown in economic activity.
• Cooling Job Market: Analysts at Pantheon Macroeconomics predict a modest 100K increase in June nonfarm payrolls, alongside a potential rise in the unemployment rate to 4.3%. This suggests the labor market is cooling.

Goldman Sachs aptly described the market's performance as "climbing the wall of worry." Investors are acknowledging the economic headwinds but betting that the Fed will step in to provide support. This week's U.S. jobs report will be a critical event in shaping expectations.

A Closer Look at Expert Predictions:

Samuel Tombs and Oliver Allen of Pantheon Macroeconomics stated: "We’re looking for a 100K increase in June nonfarm payrolls, due Thursday, with private jobs rising at the same pace, as well as an uptick in the unemployment rate to 4.3%, from 4.2% in May. This would signal the labor market is cooling, albeit too slowly for the FOMC to rush ahead and ease policy this month, before it has had more time to gauge the size of the uplift to inflation from the tariffs."

Goldman Sachs now anticipates a rate cut as early as September. Jan Hatzius and his team explained: "We are pulling forward our forecast for the next [Fed rate] cut to September... the very early evidence suggests that the tariff effects look a bit smaller than we expected, other disinflationary forces have been stronger... and while the labor market still looks healthy, it has become hard to find a job."

The anticipation of lower interest rates is outweighing concerns about the underlying economy. Should inflation remain subdued, the Fed is expected to act, potentially as early as September. This shift in expectations is fueling the stock market's current rally.

While economic uncertainties remain, investors are currently focused on the potential for monetary easing. This delicate balance between economic reality and monetary policy anticipation will continue to shape market dynamics in the weeks and months ahead.

Tags: US stock market, S&P 500, Federal Reserve, interest rates, job market, consumer spending, US jobs report, Goldman Sachs, macroeconomics, unemployment rate, FOMC, inflation, monetary policy

Source: https://fortune.com/2025/07/01/stocks-consumer-spending-job-market/