Economy Slows, Stocks Soar — What’s Behind the U.S. Market Paradox?

TradingKey - While many investors maintain bullish views on U.S. equities citing Fed rate cuts, a puzzling phenomenon continues to baffle markets: weak economic data, yet stocks keep hitting new highs.

As financial blogger ZeroHedge put it: “Good news is good news and bad news is better news.”

The Trump administration now struggles to find any data supporting claims of a strong labor market and robust economic growth. Since September, key reports have painted a bleak picture: July JOLTS job openings fell to a 10-month low, August ADP halved from July, the August nonfarm unemployment rate rose to a four-year high at 4.3%, and June nonfarm payrolls were revised from +14,000 to –13,000, marking the first negative print since 2020.

Even more concerning, the annual benchmark revision for the year ending March 2025 showed a staggering 911,000 downward adjustment in nonfarm employment — far exceeding the expected 682,000 and setting a record for the largest revision ever.

BOC Securities economists noted that a 5% revision is generally acceptable, and even 20% can be justified under severe shocks. But this “cliff-like” downgrade goes well beyond normal ranges.

Despite this, equity investors remain enthusiastic about the bull run. On Monday, both the S&P 500 and Nasdaq Composite hit new all-time highs, rising approximately 10% and 13% respectively over the past three months.

Deutsche Bank strategist Henry Allen explains the resilience of risk assets through four key factors.

The Market Acts as a Brake on Policy

Markets are functioning as a natural corrective mechanism against policy overreach — whether on tariffs, fiscal risks, or central bank independence. In many cases, policy reversals occur rapidly due to market pressure, as policymakers act to prevent deeper fallout. 

This is embodied in what the Wall Street calls the “TACO trade” — Trump Always Caves Out. The firm argues this framework remains valid because many current market stresses stem directly from policy actions. 

For example, after the April stock plunge (the so-called “Liberation Day crash”), the administration quickly announced a 90-day tariff pause — a clear case of market-driven policy reversal.

No Trigger for Risk-Off Behavior Yet

There is currently no catalyst strong enough to trigger broad risk aversion, such as a confirmed recession or a return to Fed tightening. 

Earlier in 2025, tariff fears and recession talk briefly dented equities — but markets rebounded quickly, supported by underlying economic resilience. As long as GDP growth remains positive and inflation cools, weak jobs data is seen not as a collapse, but as a signal for timely policy support — which actually boosts confidence in continued stimulus.

More Room to Cut Rates Than in Previous Cycles

Unlike the 2010s, when rates were near zero, or the post-pandemic period with soaring inflation, today’s Fed has significant room to ease: the fed funds rate is still above 4%, core inflation is trending toward target, and real interest rates remain positive. 

This Isn’t the First Time

Recent soft data isn’t unprecedented. The current slowdown mirrors conditions in summer 2024, which proved to be a temporary dip, not the start of a downturn. While labor market indicators have weakened, GDP growth remains solid — consistent with last year’s pattern.

As Deutsche Bank notes: “This isn’t dissimilar to where we are today.” Investors are interpreting today’s weakness as a buying opportunity, not a warning sign.

Together, these factors create a self-reinforcing dynamic: weak data leads to expectations of Fed easing, which fuels a stock rally; market decline triggers policy intervention, restoring confidence. 

But JPMorgan and Morgan Stanley warn that this complacency could unravel. JPMorgan strategist Mislav Matejka said that once easing resumes, markets may become more cautious and reprice downside risks — effectively unwinding an overly optimistic stance. 

The bank analyzed five potential Fed scenarios. Key takeaways: there is a 47.5% chance of a dovish 25-bp cut, in which case the S&P 500 could rise 0.5%–1%; however, there is also a 40% chance of a hawkish 25-bp cut, under which the S&P 500 would be flat or down 0.5%. In other words, not all rate cuts are created equal — and the nuance matters.