The stock market keeps climbing, yet a lot of people are feeling pretty cautious about the economy. How can we have a booming market when so many signs point to a more uncertain future? This strange disconnect – driven by everything from the AI revolution to how we're spending our money, to historical precedents – warrants closer examination. Cameron Dawson, CIO of NewEdge Wealth, and Erik Norland, CME Group Chief Economist, unpack six key questions driving this divide and the risks ahead.
This conversation has been edited for brevity and clarity. The full interview can be found here.
Q: What is the current state of the U.S. economy?
Erik Norland: The biggest story is that inflation is still running above target at 3%, which is 1% higher than the Federal Reserve’s desired target. Overall, the economy is growing slowly and is slightly overheated with above-target inflation, even as the central bank is easing policy.
Q: What is the single most important takeaway to watch with the U.S. labor market?
Cameron Dawson: The most critical question is whether the slower hiring seen over the past couple of years will morph into increased firing. In past economic cycles, a slowdown in hiring typically precedes a big uptick in the unemployment rate due to increased firings. The crucial factor to watch is whether U.S. corporations, facing margin pressures in certain areas, will be forced to increase firings. This labor risk remains the key unresolved question for the economy.
Q: Can a cooling economy and a resilient stock market truly coexist?
Norland: Absolutely, they can coexist. The perfect historical example is the mid-1990s (1995-1996). During this time the U.S. economy slowed into a soft landing, and the stock market loved this scenario because the Federal Reserve was able to ease policy. The Fed cut 75 basis points off rates, and the stock market was up over 30% in 1995 and up a further 25% in 1996.
Q: What key data point illustrates the market-economy disconnect?
Dawson: The single most important data point is the divergence between what's going on within the market cap earnings of the S&P 500 and the equal weight S&P 500. This captures the fact that there's a huge dichotomy between what's going on with the top weighted part of the market, which is benefiting from things like AI and CapEx and what's going on within the average stock, which much more reflects what's going on within the U.S. economy.
Q: What is the primary risk that suggests the current environment may be less like the 1990s soft landing?
Norland: The key difference is inflation. In the 1990s, inflation was well-behaved. This time, with inflation running above target, the situation is more reminiscent of the early 1970s, in which Federal Reserve Chairman Arthur Burns kept interest rate policy easy and lowered rates in the face of an expanding economy that later on set off a tremendous inflation in 1973 and 1974.
Q: Why is the stock market soaring while economic sentiment is low?
Dawson: A common trope is that "the market is not the economy," and this is very true. What drives the market, what drives earnings, can be very different from what drives the broader U.S. economy. But one of the reasons why we have seen such a strong market is that it's become incredibly concentrated and driven by just a few handful of names really benefiting from this massive AI CapEx cycle. And the reality is that that is also actually driving the economy as well. We're seeing AI CapEx become an increasingly large part of U.S. economic growth.
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