What makes the US stock market so unbreakable?

This week, with all the geopolitical chaos and economic surprises, you’d expect the US stock market to take a hit.

But the S&P 500 literally recorded its second-highest close ever yesterday. It’s now less than 0.5% away from a new all-time high. In spite of global unrest and dashed hopes for a Fed 50 basis point rate cut, the market remains rock solid.

The S&P 500 is up more than 1,000 points year-to-date and has surged by 40% since October 2023. This adds up to an insane $14 trillion in market cap in under a year (roughly $1.2 trillion every month).

An unbreakable market?

The narrative that inflation would fall to 2% and the Fed would keep cutting rates has fueled a rally. Multiple 50 basis point rate cuts were being priced in for this year.

But that all changed last week. A surprisingly strong jobs report crushed any hopes of an aggressive rate cut.

The US economy added 107,000 more jobs than expected in September, pushing the unemployment rate down to 4.1%.

Odds of a November rate cut dropped from nearly 50% to a mere 3%. And the chances of at least one 50 basis point cut in 2024 slid to 18%. Yet the market didn’t even flinch.

And the tech sector is a beast. Growth stocks, especially those in artificial intelligence (AI), continue to be the market’s strength.

The Russell 1000 Growth Index has surged by nearly 11% this year. Meanwhile, other sectors, like value stocks, have struggled to keep up.

The so-called ‘Magnificent Seven’ (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla) makes up for about 60% of the S&P 500’s recent gains.

AI and tech innovation are keeping these companies strong, even when interest rates are high.

Take Nvidia for example. It’s benefiting massively from the AI boom, and investors (and the global economy) are banking on its future profitability.

History backs the market’s strength

History shows that the US stock market has recovered from some serious downturns. The 2008 financial crisis saw a nearly 50% drop, but within a few years, the market reached new highs.

The COVID-19 pandemic? Same story. After a massive drop in March 2020, the market shot back up, driven by stimulus measures and tech stocks.

Looking at data from the past two decades, US stocks have posted gains in 17 of the last 20 years, even with substantial intrayear declines. 

Investors know this pattern, and it keeps them confident, even during rough patches. Now, UBS is saying the US might be heading for a “Roaring ’20s” kind of boom.

UBS analysts believe there’s a 50% chance of a massive economic growth cycle similar to the one seen after World War I. 

Back then, the US economy saw a construction boom and rising prosperity for families. UBS says AI and tech innovation today mirror the widespread adoption of electricity and cars in the 1920s. 

Whether we get that Roaring ’20s scenario again remains to be seen, but investors are already buying into it.

Even though there are concerns about inflation rebounding, unemployment rising, or even a possible recession, investors are betting on continued growth. 

A Financial Times survey of 37 economists found that most don’t expect a contraction in the next couple of years. This outlook has fueled a soft-landing consensus among investors. 

They believe the Fed’s balancing act between inflation and unemployment will lead to stable growth without crashing the market.