The world of finance in mid-2025 presents investors with a real puzzle. While macroeconomic reports signal a contraction of the U.S. economy — the first in three years — key stock indices such as the S&P 500 and Nasdaq 100 show strong growth and are approaching historical highs. This seemingly illogical dynamic confuses many, but with a deeper analysis, a clear picture emerges where economic reality and market psychology move in opposite directions.
Let's try to understand this paradox and why under current conditions 'bad news is good news' for the stock market.
Key theses and their analysis
Analysis of the latest economic data from the U.S. allows us to highlight several central themes that together form this paradoxical picture.
1. U.S. Economy: Clear signs of contraction
Fundamental indicators leave no doubt: the American economy is experiencing a downturn.
GDP contraction: The final estimate of GDP for the first quarter of 2025 showed an annual contraction of -0.5%. This is a sharper decline than previously expected (-0.2%) and the first quarterly contraction in three years.
Consumer weakness: The main reason for the decline was a sharp slowdown in consumer spending, which increased by only 0.5% — the lowest figure since the pandemic in 2020.
Trade imbalance: The goods trade deficit increased by 11.0% in May to $96.6 billion due to a 5.2% drop in exports.
Other indicators: The picture is complemented by an unexpected decline in wholesale inventories (-0.3%) and a negative value of the national activity index from the Chicago Fed (-0.28), confirming that economic activity is below its average level.
2. Stock market: Bullish sentiment against all odds
Despite the grim statistics, there is euphoria in the stock market. On the same day that GDP contraction data was released, the S&P 500 rose by 0.4%, while the high-tech Nasdaq 100 gained 0.5%, setting a new recent record. This optimism completely ignores current economic difficulties and is based solely on expectations of future stimulus.
3. The main market driver: expectation of Fed policy easing
Today's market operates on the principle of 'the worse, the better'. Each batch of negative statistics is perceived by investors as another argument that the Federal Reserve (Fed) will be forced to intervene and ease monetary policy sooner than planned.
Decline in bond yields: The yield on 10-year U.S. Treasury bonds fell below 4.29%, reaching a low since early May. This is a direct indicator that the market is pricing in future rate cuts.
Political pressure: Expectations are significantly intensified by political factors. According to The Wall Street Journal, President Trump is considering announcing his candidate for the head of the Fed in advance. This is perceived by the market as an attempt to create a 'shadow chairman' who will lobby for a softer monetary policy necessary to stimulate the economy.
4. The U.S. dollar under pressure
A direct consequence of the expectations for rate cuts was the weakening of the U.S. dollar. The Dollar Index (DXY), which tracks its value against a basket of global currencies, fell to a three-year low of 97.00. As the yields on dollar-denominated assets (such as government bonds) decrease, global investors prefer to divest from them, leading to the currency's decline.
5. The housing and labor market: mixed signals
Not all sectors of the economy are showing an unambiguous decline.
Housing market: Sales in the secondary housing market unexpectedly rose by 1.8% in April compared to the previous month. This is aided by a slight decrease in average rates for 30-year mortgages to 6.77%. This gives buyers some respite and stabilizes the sector.
Labor market: The data here is contradictory. On one hand, initial claims for unemployment benefits fell to 236,000. On the other hand, the total number of Americans receiving benefits rose to 1,974,000 — a peak since November 2021. This indicates that it is becoming increasingly difficult for the unemployed to find suitable new jobs.
Conclusions and possible consequences
The gap between the economy and the market. There is a clear divide: the real economy is weakening, while the stock market is rising on expectations. This growth is extremely speculative and depends not on the fundamental strength of companies, but on hopes for future liquidity from the Fed.
Politics as the main conductor. At the moment, political maneuvers around the Fed have more influence on quotes than economic reports. Any hint that the Fed will adopt a hawkish stance or delay rate cuts could provoke a sharp correction.
Weakening dollar and cryptocurrencies. For the crypto market, a weakening dollar is a positive signal. Historically, a decline in DXY has often correlated with the rise in the price of Bitcoin and other digital assets, which are viewed by investors as an alternative means of saving and protection against the devaluation of fiat currencies.
Volatility is the new norm. The current situation, based on rumors and expectations, creates ideal conditions for increased volatility. For experienced traders, this is a time of unique opportunities, but for newcomers, it is a period of heightened risk.
P.S. We are witnessing a classic case where market psychology is completely at odds with economic reality. U.S. markets are dancing to the tune of expectations for cheap money, fueled by unprecedented political pressure. This is a dangerous but potentially very profitable dance. For those operating in the cryptocurrency world, the risk appetite in traditional markets and the weakening dollar can create a strong tailwind. The main thing to remember is that any party based on rumors rather than facts can end very suddenly.