Why is US stock market rising despite inflation warnings? – Investing Abroad News

US Stock Market: The US stock market ended a remarkable week on a mixed note on Friday, with the Dow Jones Industrial Average and S&P 500 falling slightly, while the Nasdaq Composite reached another record high. Despite Friday’s decline, all three major indices posted weekly gains, with Nasdaq up 2% over five sessions, marking the largest increase among the benchmarks. 

A combination of technology-led growth expectations, improving inflation signals, corporate resilience, and positive investor sentiment is currently driving Wall Street to unprecedented heights this September.

Investors have been buoyed by renewed optimism surrounding the artificial intelligence (AI) boom and growing confidence that the Federal Reserve will soon cut interest rates.

While stock prices soar, broader economic indicators are signalling caution. Preliminary September estimates from the University of Michigan suggest Americans’ confidence is waning, and long-term inflation expectations have risen. Joanne Hsu, director of the surveys, noted, “Consumers perceive risks to their pocketbooks.” 

Meanwhile, key data points indicate slowing job growth, persistent inflation, and concerns over President Donald Trump’s tariffs. The S&P 500, however, has gained more than 11% this year, demonstrating a striking divergence between stock-market performance and traditional measures of economic health.

Why stocks are soaring?

According to experts, several factors explaining the market’s resilience amid disappointing economic data.

Interest-rate expectations: Sluggish job growth could encourage the Federal Reserve to reduce its benchmark interest rate, easing borrowing costs and stimulating investment. A slowdown in hiring may also reflect increased adoption of AI technologies, boosting productivity and corporate profits.

Weak Dollar benefits exporters: The US dollar has fallen roughly 10% since January, which, while signalling reduced confidence in the broader economy, benefits multinational companies listed on the S&P 500. A weaker dollar makes exports cheaper and more competitive globally, supporting earnings for firms with significant overseas sales.

Corporate adaptation to tariffs: Major companies have adjusted strategies to cope with trade tensions, including renegotiating supplier contracts, passing costs to customers, or identifying cost-saving measures. These mitigations have helped stabilise earnings and maintain investor confidence.

Tech and AI drive market momentum

Optimism surrounding AI and technology continues to propel markets. The so-called “Magnificent Seven” tech giants including Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla, remain central to market gains. Strong earnings, cloud adoption, and AI infrastructure expansion are lifting valuations. Oracle’s recent surge, driven by AI and cloud revenue growth, exemplifies the technology-led rally.

Investor psychology and market mechanics

Beyond fundamentals, market psychology plays a crucial role. Momentum trading, passive investing, and herd behaviour reinforce stock purchases amid consecutive record highs. Previous trends suggest the S&P 500 often closes at record highs, particularly outside periods of severe economic crisis. As Tiffany Wilding, economist at PIMCO, observed, “It’s essential to remember that the economy and the stock market are not the same thing.”

Additional market factors

Other influences include rising Treasury yields, with the 10-year yield around 4.058%, oil price rallies following UK sanctions on Russia, and record-high gold prices closing at $3,690.40 per troy ounce. Experts also note easing trade tensions and temporary tariff exemptions have bolstered corporate optimism, contributing to stock-market strength despite ongoing economic headwinds.

Meanwhile, despite the surge, some experts warn that market valuations are historically high and reminiscent of previous speculative bubbles. Volatility remains a risk, particularly if inflation persists or the Federal Reserve’s actions differ from investor expectations.