By Jacob Sonenshine

The economic headlines look scary, but the market is seeing nothing but good times ahead. There's every reason to believe that stocks have it right.

There may not have been a scarier piece of economic data than the one that came out of the Bureau of Labor Statistics this past Tuesday reducing estimates of job gains for the 12 months ended March 2025 by 911,000. It reflects that hiring has been far weaker than previously thought, as companies don't see strong enough demand to aggressively ramp up hiring.

The stock market didn't see it that way. The S&P 500 index was on track to close up 1.3% this past week, while the Nasdaq Composite was set to rise 1.4% and the Dow Jones Industrial Average, 0.8%. The gains suggest that the stock market is either ignoring an economic slowdown or is keying off something the data don't show (or Oracle's blowout earnings report).

It's not hard to spot what the bears are sniffing out -- a late-stage economy. That's when economic growth has already been expanding for several years, and then starts to slow. If it slows enough, everyone -- markets, businesses, and consumers -- starts worrying about a recession. The weak data from the jobs market and elsewhere suggest that the economy may be about to hit a wall.

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, isn't so sure. While investors focused on the revisions to data for a period that began a year and a half ago, he was seeing signs of optimism in more recent payrolls data. He notes that revisions to the monthly numbers have been getting smaller, suggesting that the labor market may have been at its weakest point in June. The bank's historical data, reaching back to 1979, show revisions tend to see this type of improvement when the economy moves out of a downdraft and into the early stages of a new expansion.

If Wilson is correct, the U.S. has been suffering from a "rolling recession" -- individual sectors, such as consumer goods and manufacturing, have taken turns being at the center of slowdowns even though the overall economy never endured a downturn. If that weakness is ending, then the economy may just be starting to accelerate again, not slowing further. "The weak jobs report supports our view that we're transitioning to early cycle," writes Wilson, who has a 6500 price target on the S&P 500.

And a series of Federal Reserve Rate cuts, beginning this coming Tuesday, could get it all the way there. Rate cuts essentially pump money into the U.S. economy, which can get the economic juices flowing in the U.S. It's one of three catalysts, along with tariff policy easing and the stimulus coming from President Donald Trump's tax and spend bill, that can create "a sustainable shift to earlier cycle," writes Chris Senyek, chief investment strategist at Wolfe Research.

If it truly is early in the cycle, sales and earnings should keep growing, something the market already predicts. Analysts expect S&P 500 earnings, in aggregate, to grow 13% next year, according to FactSet. That would be another support for the market.

The only thing to fear is fear itself.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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September 12, 2025 13:04 ET (17:04 GMT)

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