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The S&P 500 (^GSPC) keeps notching record highs even as hiring cools and unemployment rises -- "the curious case of a jobless expansion," as JPMorgan dubs it.
The bet is straightforward: Weaker jobs push the Fed to cut interest rates, lower rates lift valuations, and slower wage growth fattens margins.
It may sound counterintuitive -- rising unemployment and rising stocks don't usually go together -- but it's not without precedent.
"We have seen rising stocks and unemployment before," said Piper Sandler's Michael Kantrowitz, pointing to past cycles in the 1950s, 1960s, and early 1990s when weak jobs pulled rates lower and fueled equity rallies.
Goldman Sachs strategist David Kostin put it bluntly: "A cooling labor market is a tailwind to corporate profits, all else equal," since wages, the biggest line item on most companies' balance sheets, are decelerating.
In other words, what hurts workers can help lift stocks. Add in AI investments and still-resilient earnings, and Wall Street forecasters are now calling for the S&P 500 to climb as high as 7,000 by year-end.
But Main Street isn't necessarily cheering. Sentiment is sliding, especially among households squeezed by tariffs and rising prices. The University of Michigan's September survey showed long-term inflation expectations jumping for a second straight month, while nearly half of retail investors in the latest AAII poll now call themselves bearish, the most since April's tariff lows.
For younger Americans, the story looks even bleaker. The unemployment rate for workers ages 16 to 24 jumped to 10.5% in August, the first double-digit reading since the pandemic, while recent college graduates are now facing higher jobless rates than the broader workforce, a sharp reversal of the pre-pandemic norm.
And that's the catch. Stocks are climbing because investors expect Fed rate cuts -- not because the economy is on solid footing. At some point, that logic starts to look shaky.
EY chief economist Gregory Daco called the "jobless expansion" plausible but fragile. "We're seeing conflicting winds," he told Yahoo Finance, pointing to policy headwinds like tariffs and immigration restrictions even as AI investments prop up growth. "There is a little bit too much exuberance relative to the downside risk to the economy."
For now, Wall Street is happy to cheer bad news. But that trade-off won't last forever.