Analysis-What’s good for the US economy now may not be good for stocks
Written by: Caroline Valetkevitch and Karen Brettell
NEW YORK, June 29 (Reuters) – The U.S. economy and the U.S. stock market are starting to go their own way.
An eventful June that included the launch of the record-breaking SpaceX IPO and the first meeting of Federal Reserve chief Kevin Warsh was full of contradictions.
Sentiment is improving as U.S. economic data remains solid, led by continued employment gains and strong consumer spending. But the Nasdaq and S&P 500 are down for the month, and shares of the once-unstoppable Magnificent Seven technology are down more than 10% by one measure. Treasuries have rallied, sending yields lower even as inflation surpassed 4% last week for the first time in three years.
“It strikes me that consumers remain resilient in their spending on non-energy goods and services during a period of high energy prices,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. “So this type of combination strongly suggests a level of economic stability, resilience and strength above what we intuitively expected going into the year. This creates some upside risk to US growth forecasts.”
RISING REAL RATES CHANGE THE GAME
Investors are at a crossroads as inflation-adjusted real interest rates fluctuate in markets driven by the epic AI investment boom. Warsh’s hawkish turn has increased bets that the central bank will raise interest rates. Many analysts doubt he will actually do this, as tightening financial conditions have sent gold and Bitcoin sharply lower, as well as Microsoft and Meta.
Meanwhile, Wall Street is selling new shares and debt at a dizzying pace. This is partly to fund more AI spending, whose proponents deride any bubble talk as blasphemy, but it also reflects resilient investor demand.
The tension between a solid, if unbalanced, economy and a vibrant market driven mostly by a single sector has often been decided in favor of markets whose coefficients consistently appear near all-time highs. However, this trend may not hold true in an era where real borrowing costs are higher.
Goldman Sachs analyst Kamakshya Trivedi said this month’s collapse of war fears and the drop in oil prices had returned markets to a “friendly fundamental/cyclical backdrop but one reflected in higher valuations.” “This tension is most acute in the field of artificial intelligence, which is also a major source of volatility in stock markets.”
Much of this volatility comes from investors jumping from one momentum trade to the next. Since war fears peaked in markets in late March, the semiconductor index has gone nearly parabolic, sending the index up 87% for the year. Micron quadrupled by 2026, while Intel and Marvell Technology tripled.
