MW Is the economy as good as Wall Street says it is? Financial markets and data are telling different stories.

By Isabel Wang

Strong second-quarter earnings have been led by financial and tech firms, but they've offered little evidence of robust consumer health

What's the real story on the economy?

The U.S. stock market has been on a tear and acting like there's nothing but good news ahead - with major stock indexes hovering near fresh records, investors in a mood to take on risk, and megacap technology stocks soaring on renewed hype around artificial intelligence.

Yet beneath the surface, the economic story is far less euphoric: The U.S. labor market is weakening, the large services side of the economy is stagnating, and inflation is ticking up.

So why is Wall Street partying while consumers are starting to feel the pinch?

The stock market has been on a hot streak at the start of the second half of 2025. The three major stock indexes have been on a seemingly relentless climb to fresh records, with the S&P 500 SPX and Nasdaq Composite COMP up over 2% and 4% so far this quarter, respectively, according to FactSet data.

Small-cap stocks have also ripped higher, pushing the benchmark Russell 2000 index RUT above a milestone known as a "golden cross" for the first time since January 2024, according to Dow Jones Market Data. A golden cross is a chart pattern used by technical analysts as a gauge of a potential bullish trend for a security or a stock index; it occurs when the 50-day moving average of a stock or index finishes above its 200-day moving average.

Stock sectors were also echoing the bullish trend, with cyclical areas such as industrials, consumer discretionary and materials picking up momentum on Wall Street this quarter, even as megacap technology stocks were still leading the rally.

The S&P 500's consumer-discretionary sector XX:SP500.25 has jumped 2.3% since early July, while the industrials XX:SP500.20 and materials XX:SP500.15 sectors have gained 2% and nearly 1% in the same period, respectively, according to FactSet.

Unlike megacap tech names, cyclical stocks and small caps are more exposed to higher interest rates and therefore more vulnerable to economic downturns. But the divergence between frothy markets and fading economic momentum has raised questions about how long the rally can sustain - and whether investors can ignore the writing on the wall.

"What the market is doing, in our view, is looking through the slow growth in second half of this year and expecting the economy to reaccelerate next year, with the tailwind of both lower interest rates from the Fed and some stimulus from Trump's One Big, Beautiful Bill," said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors.

See: Investors can't afford to ignore the stagflation threat shadowing the market

To be sure, Friday's weak July employment report delivered a reality check on the U.S. economy, with the data suggesting very few employers hired last month amid the uncertainty of on-again, off-again tariffs.

Adding to the concern, this week's ISM services index showed the services side of the economy barely grew in July, as ongoing trade wars raised costs and spurred reductions in employment - fueling renewed stagflation fears that have loomed over markets this year.

The batch of softer-than-expected economic data prompted some market participants to reassess their expectations for interest-rate cuts this year. Fed-funds futures traders are now pricing in a growing likelihood of a Federal Reserve rate cut in September - with a 25-basis-point reduction now seen as having a 91% probability, in a sharp rise from last week, according to the CME FedWatch Tool.

However, the actual scale and effectiveness of upcoming rate cuts this year remain largely unknown, leaving "not enough information" for anyone to understand how quickly the economy might reaccelerate, Roth said.

"We definitely think the Fed is going to start cutting rates in September, but how much they cut is going to be critical to understanding how fast the economy accelerates next year," Roth told MarketWatch via phone on Wednesday. "We also don't know what inflation is going to look like next year, since the tariff situation is still too uncertain to really understand and parse that out."

See: Trump's new tariffs start today. Here's who's getting hit, and by how much.

Q2 earnings are all about financials and tech

So how can stocks keep rallying with so many uncertainties on the horizon?

Despite macroeconomic concerns, many companies - especially those in the technology and financial sectors - have still posted solid quarterly earnings and forward guidance, partially helping justify the elevated valuations in the stock market.

As of Wednesday, more than two-thirds of the S&P 500 had reported for the second quarter, and their results largely came in better than expected, according to HSBC Global Investment Research.

"Initial consensus expectations were for a low 5% growth, but reported earnings are now tracking almost double that," said Nicole Inui, head of equity strategy of Americas at HSBC.

"Financials and tech are leading the way, with earnings growth in the double digits in both cases so far. More than 90% of tech stocks have beat EPS estimates, with many touting the benefits of AI," Inui wrote in a Wednesday client note.

But in the view of Roth, big banks posted strong earnings largely due to strength in their trading divisions and a pickup in mergers-and-acquisitions activity. While banks didn't raise major concerns about consumer-loan losses, they also didn't paint a picture of "particularly strong consumer health or spending," he noted.

In terms of technology companies, half of the tech sector has yet to report their quarterly results, according to HSBC. Nvidia Corp. (NVDA) will release its fiscal 2026 second-quarter financial results on Aug. 27.

U.S. stocks were mostly lower on Thursday afternoon. At last check, the Dow Jones Industrial Average DJIA was falling 0.8%, while the S&P 500 was losing 0.4% and the Nasdaq was down 0.1%, according to FactSet.

-Isabel Wang

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August 07, 2025 13:41 ET (17:41 GMT)

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