Blame AI for the market and economy disconnect
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Brendan Lynch/Axios
One of Wall Street's oft-repeated adages — the stock market is not the economy — is more true "than ever" as stocks are near records while the economic vibes are mixed at best, says Trevor Slaven, global head of asset allocation at Barings.
Why it matters: The biggest companies in this market are getting large portions of their revenue from each other rather than from consumers.
- If that B2B spending slows, so could the market.
Driving the news: The Federal Reserve's meeting minutes last month mentioned concerns about elevated stock valuations.
- But stock valuations are historically unlinked to economic health.
By the numbers: The top 10 companies in the S&P 500 make up 40% of the index market cap. Just half of those companies are expected to spend nearly $400 billion on AI this year.
- These companies are often spending that money on each other, such as Amazon buying chips from Nvidia, for example. As these firms continue to do well, they have more and more money to spend on each other.
Zoom in: It's not hard to paint a bearish picture on the state of the economy right now using the latest data.
- The labor market is the worst it has been since 2008, except for the pandemic era, Slaven says. Meanwhile, wage growth is slowing.
- The housing market "is anemic," writes Bob Elliott, chief investment officer at Unlimited Funds. Consumer spending, per retail sales data, popped in July, but that demand is likely from shoppers rushing to get ahead of tariff policy, he notes.
Be smart: The data so far measures an economy that has yet to feel the full effects of tariff policy.
- Low-income populations have already been in a recession, Slaven says.
- High earners benefit from the wealth effect, with stocks near records.
State of play: The market has not always felt this disconnected from the economy.
- Post-financial crisis, pre-Big Tech surge, the market leaders were much more consumer facing. In the 2010s, names such as Johnson & Johnson, Walmart and Procter & Gamble were market leaders.
- Since these company earnings are tied to primarily to consumer spending, the market was arguably more of an accurate gauge on the economy then.
Yes, but: Today's tech giants may be more diversified than ever. The Magnificent 7 alone has snapped up more than 800 companies, per Bloomberg.
- "Do these big companies just eat the rest of the world?" notes Ben Sullivan, chief investment officer at AE Wealth Management. "Is it going to be about 10 to 15 names forever?"
What we're watching: AI spending has gotten so high that it's starting to account for a higher share of GDP growth than consumer spending.
- AI stocks could start to dominate both the market and economic data. That could make it increasingly hard to suss out the health of the real economy: consumers.
The bottom line: Stocks are pricey and concentrated, inflation is high, the labor market is weak, and tariff effects are still looming.
- Prepare for choppiness ahead, but don't let market moves frame your thinking on the health of the economy.
