The stock market is rising, but the U.S. economy is not really keeping up. That's what Morgan Stanley warned this week in a new report led by strategist Ariana Salvatore, as stocks continue to rally while key economic signals are weakening.
Currently, the S&P 500 index has risen nearly 10% since January, the Nasdaq Composite has increased by more than 11%, and the Dow Jones Industrial Average has risen by more than 7%. But beneath the surface, not everything is rosy.
The report points to Donald Trump's return to the White House and a series of new policies; some accelerated, some reused. He has extended tax cuts from his first term, added new taxes, and imposed tighter immigration restrictions.
These changes have raised concerns on Wall Street, especially about how they will affect consumer spending. At the same time, job growth is slowing, and inflation remains above the Federal Reserve's 2% target.
Trump's policies have uneven effects across sectors.
Ariana's team at Morgan Stanley believes the gap between economic health and market strength comes from how different industries are affected by Trump's actions. Some sectors are struggling, but others are thriving, and the thriving sectors carry more weight in the index.
That's why keeping the broader market stable is important. "Tariffs are a clear drag on profits for some sectors," Ariana explained, "but the overall market capitalization weight of this group is limited."
The negative impacts, tariffs, and immigration rules are mainly falling on smaller sectors that do not contribute much to the value of the S&P 500 index. At the same time, sectors benefiting from tax cuts and deregulation, such as technology and industrials, are more widely distributed in the index.
"Simply put," Ariana added, "the negative impacts are concentrated in sectors that do not represent a significant part of the S&P market capitalization, while the advantages are being broadly distributed across a larger group affecting index-level performance."
This uneven outcome means Wall Street is looking at each sector and even each company. They are not viewing the economy as a big picture. That's why the market remains strong while hiring slows down and inflation remains steady.
Ariana explained that the overall backdrop is weakening, but not enough to pull everything down or cause a recession. Stocks, in that scenario, can still perform.
One sector under pressure is personal consumption. These companies are being hit hardest by tariffs and Trump's immigration rules. They rely on cheap goods and labor, both of which are becoming harder to find or more expensive.
Meanwhile, the industrials and semiconductors remain resilient. Artificial intelligence is playing a crucial role here, driving demand and keeping these sectors stable. Even as Trump's trade policy fluctuates, the foundations in these industries remain intact.
Healthcare is in decline, Fed hints at rate cuts to come.
But healthcare? That's where things get ugly. Eric Teal, chief investment officer at Comerica Wealth Management, says the sector faces more than just one dark quarter.
"Although the tariffs policy seems volatile on the surface," Eric said, "the economy is in the midst of an expansion phase and the base of companies is solid with one notable exception, healthcare," calling it a "survival threat to profits."
Healthcare companies are being squeezed by pricing, regulations, and cost pressures, and investors are pulling back. Even big names are struggling. Microsoft, Netflix, Walmart, and Apple all saw stock declines last week, and the S&P 500 just went through five consecutive days of losses up to Thursday.
That was the longest streak of losses in months. But Friday brought some relief. Federal Reserve Chairman Jerome Powell spoke at the Fed's annual Jackson Hole event and opened the door to possible rate cuts as soon as September.
However, some analysts think the pullback is just part of the cycle. Time will tell what proves true.
KEY Difference Wire helps cryptocurrency brands break through and dominate headlines quickly.
Register for a Binance account to receive perpetual trading fee rebates:
- New account registration link: https://accounts.binance.com/register?ref=Q2FSX523
- Referral code: Q2FSX523
