BREAKINGVIEWS-Stock euphoria is at odds with economic gravity

By Sebastian Pellejero

NEW YORK, June 13 (Reuters Breakingviews) - Investors are partying like the cycle never ends. The market value of the S&P 500 Index .SPX sits just 2% below its $54 trillion all-time-high, buoyed by hopes of interest-rate cuts and the rise of artificial intelligence. At the same time, economic signals are flashing warnings of a downturn. The Goldilocks outcome is that the Federal Reserve gets just enough cause to ease policy without conditions weakening to a harmful level. Between rising geopolitical risks and threats to the consumer engine of the U.S. economy, though, the odds are lengthening.

There’s been plenty of doubt to overcome already. The NASDAQ Index tumbled 11% after President Donald Trump unveiled sweeping levies against U.S. trade partners on April 2. The S&P 500 lost nearly 8%, though it proved fleeting: the index now trades at around 22 times next year’s earnings, close to its post-pandemic peak.

Pauses in Trump’s trade broadside aided the rebound, as did subdued inflation and stunning growth among tech titans like Microsoft MSFT.O. However, it also reflects another, more troubling pattern. Ever since the Federal Reserve rapidly hiked interest rates starting in 2022, the question has been when this dampener on financial activity would be eased back. The key would be subsiding price rises and a weak-enough job market to nudge policymakers.

This is the “bad news is good news” trade. Stocks are increasingly moving in lockstep with jobless claims, according to data compiled by Renaissance Macro. The three-year rolling relationship is at its tightest since 1993, after being negative -- meaning that fewer jobless claims correlated with higher stock prices -- as recently as 2023.

The bad news looks bad indeed. Jobless claims are nearing a level that indicates shrinking employment overall. The payroll diffusion index, a measure of how widely jobs are being added across different sectors, just hit its lowest level since July 2024, shortly before the Fed’s last rate cut.

Thing is, officials have made clear that they are in no rush to ease policy. Markets once priced in rate cuts as early as March, but are now anticipating them in September or later, according to CME Group data.

Even when they do arrive, they may well follow critical economic weakening, rather than preventing it. AI might make tech companies more resilient than before, but the U.S. is still overwhelmingly a consumer-driven economy. The outbreak of hostilities between Israel and Iran, already driving a spike in oil prices, could scramble energy markets, shipping and more. The risk isn’t that the Fed won’t cut. It’s that by the time it does, it won’t matter.

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CONTEXT NEWS

Wall Street’s main indexes fell around 1% on June 13 while oil prices surged 7%, after Israel’s deadly strike on Iranian nuclear facilities heightened tensions in the Middle East. The S&P 500 now sits around 2% below all-time highs touched in February, while the tech-heavy Nasdaq trades about 3% below the peak reached in December.

Initial claims for unemployment benefits totaled 248,000 during the week ending June 7, the Labor Department said on June 12, unchanged from the previous week’s revised level. Claims reported during the past two weeks are at the highest levels since October.

Earlier in the week, Labor Department data showed headline inflation stood at 2.4%, lower than the 2.5% rise estimated by economists polled by Reuters.