Why are stocks soaring when economists warn of stagflation risks? US and global equities keep smashing records, with the S&P 500 and Nasdaq hitting back-to-back all-time highs this week (Dow up 1%, S&P +0.3%, Nasdaq +0.1%). Traders have virtually bet the house on a September Fed rate cut—odds north of 94%—even as core US inflation ticked up to 3.1% in July, above the Fed's 2% target.
This bad news is good news logic stems from tepid job growth (recent payrolls: +73,000) and sharp downward revisions, which took the three-month hiring average down to just 35,000. The result: Wall Street sees dovish pressure outweighing inflation, especially as Treasury yields fall and volatility (VIX) hits year-to-date lows.
Meanwhile, AI and mega-cap tech stocks continue to drive the indices: the "Magnificent Seven" now make up roughly one-third of S&P 500 weighting. But with market breadth thin, just a stumble from these heavyweights could disrupt record-breaking optimism.
