Wall Street's Paradox: Stocks Soar Amid Rising Unemployment

In a peculiar turn of events, the S&P 500 is scaling new record highs even as the labor market shows signs of cooling and joblessness increases. JPMorgan Chase has dubbed this phenomenon a "peculiar case of jobless expansion." The underlying bet is relatively straightforward: weak employment data encourages the Federal Reserve to cut interest rates. Lower interest rates create higher valuations, and slowing wage growth boosts corporate profit margins. This may seem counterintuitive, as rising unemployment and a rising stock market don't typically occur simultaneously. However, it's not without precedent. Piper Sandler's Michael Kantrowitz points to past cycles in the 1950s, 1960s, and early 1990s when soft employment data pulled down interest rates and fueled stock market rallies.

The Impact of Lower Wages on Corporate Profits

Goldman Sachs strategist David Kostin puts it bluntly: "All else equal, a cooling labor market is a tailwind for corporate profits because wages—the largest line item on most company balance sheets—are decelerating." In other words, what's bad for workers may help boost the stock market. Coupled with AI investments and still-strong earnings, Wall Street forecasters are now calling for the S&P 500 to climb as high as 7,000 by year-end.

Deteriorating Consumer Confidence and its Impact

However, not everyone is cheering. Consumer confidence is slipping, especially among households squeezed by tariffs and rising prices. A University of Michigan survey in September showed long-term inflation expectations jumping for the second consecutive month. And in the latest American Association of Individual Investors (AAII) poll, nearly half of retail investors now say they are bearish, the highest proportion since the April tariff lows.

Labor Market Challenges for Young People

For young Americans, things look particularly grim. In August, the unemployment rate for workers aged 16 to 24 jumped to 10.5%, the first time it has hit double digits since the pandemic. And the unemployment rate for recent college graduates is now higher than that of the overall workforce, a reversal from pre-pandemic norms. The crux of the issue is that the stock market is rising because investors expect the Federal Reserve to cut interest rates, not because of solid economic fundamentals. At some point, this logic will begin to look shaky. Ernst & Young chief economist Greg Daco says, "Jobless expansion is seemingly rational but fragile, and we are seeing conflicting headwinds." While AI investments are supporting stock market growth, he points to policy headwinds such as tariffs and immigration restrictions. "There is a little bit of exuberance in the stock market relative to the downside risks to the economy. Ultimately, bad news will no longer be good news."