A strange phenomenon emerges in the US: the job market cools down while the US stock market repeatedly hits new highs

The S&P 500 Index continues to hit record highs even as hiring cools and the unemployment rate rises, which JPMorgan calls a "peculiar case of jobless expansion."

The logic behind this bet is simple: weak employment data prompts the Federal Reserve to cut interest rates, lower rates boost valuations, and slowing wage growth increases corporate profit margins.

This may sound counterintuitive—rising unemployment and a surging stock market don’t usually happen at the same time—but it’s not without precedent.

Michael Kantrowitz of Piper Sandler said, "We have seen the stock market and unemployment rate rise together before." He pointed to past cycles in the 1950s, 1960s, and early 1990s, when weak employment data pulled down interest rates and fueled a stock market rebound.

Goldman Sachs strategist David Kostin put it bluntly: "All else being equal, a cooling labor market is a tailwind for corporate profits, because wages—the largest item on most company balance sheets—are slowing down."

In other words, what’s bad for workers may help boost the stock market, and with AI investment and still-resilient earnings, Wall Street forecasters are now calling for the S&P 500 to climb as high as 7,000 points by year-end.

But the general public may not be cheering.

Currently, U.S. consumer confidence is declining, especially among households squeezed by tariffs and rising prices. The University of Michigan’s September survey showed that long-term inflation expectations jumped for the second consecutive month, while in the latest American Association of Individual Investors (AAII) poll, nearly half of retail investors now describe themselves as bearish, the highest proportion since the tariff lows in April.

For young Americans, the situation looks even bleaker. In August, the unemployment rate for workers aged 16 to 24 jumped to 10.5%, the first double-digit reading since the pandemic, and the unemployment rate for recent college graduates is now higher than for the overall workforce—a stark contrast to pre-pandemic norms.

That’s the issue. The stock market is rising because investors expect the Federal Reserve to cut rates, not because the economic fundamentals are solid. At some point, this logic will start to look shaky.

Greg Daco, chief economist at Ernst & Young, said, "Jobless expansion is seemingly reasonable but fragile, and we are seeing conflicting signals."

Although AI investment is supporting U.S. stock growth, he pointed to policy headwinds such as tariffs and immigration restrictions. "Relative to downside economic risks, there is a bit of excessive exuberance in the market. Eventually, bad news will no longer be good news."