A government shutdown. A weakened labor market. Stubborn inflation.
None of this seems to matter to the stock market. At least not yet.
Stocks closed moderately lower on Tuesday, but it was the first day down in more than a week. The broad S&P 500 and tech-heavy Nasdaq indices have recorded more than 30 record closes this year. Futures rose slightly Wednesday morning.
As other parts of the economy show strain, market gains are fueling concerns about an economy in which the wealthiest American households continue to prosper even as low- and middle-income families languish.
“This signals the bifurcation of the economy,” said Steve Sosnick, chief strategist at financial group Interactive Brokers.
Two forces have been driving much of the market’s recent advance: investments in artificial intelligence and the prospect of lower interest rates.
Sosnick pointed to calculations showing that spending on building AI infrastructure, such as data centers, is now responsible for a huge portion of this year’s economic growth.
That spending hasn’t generated much new job creation in the broader economy: 2025 is on track to be one of the worst years for new payrolls added this century. The government shutdown has delayed the release of official September jobs data, but on Tuesday, private equity giant Carlyle said its internal indicators suggested the U.S. economy added just 17,000 new payrolls last month. Last week, payroll processor ADP released a report that also showed a significant slowdown in the labor market.
But the rise of AI has helped stock investors get even richer. According to data cited by investment magazine Barron’s, the seven technology stocks that make up the so-called “Magnificent 7” were responsible for about two-thirds of the S&P 500’s 3.65% gain last month, and have driven about 41% of the index’s nearly 15% gain this year.
“I think there’s always a little bit of a K-shaped nature to the economy,” Sosnick said. “But it went from looking like a lowercase ‘K’ to a capital ‘K.'”
Meanwhile, economic uncertainty shows no signs of abating.
Government shutdowns typically have a limited impact on markets and the economy. However, this time it could be different. As the shutdown enters its second week, the White House has begun threatening mass layoffs, while President Donald Trump and other Republican officials question the government’s obligation to issue back pay. With government spending still a significant part of the economy, any of these developments could have consequences for growth if implemented.
Trump also continues to implement tariff plans, only to delay their implementation. The latest example is a proposed tariff on imported trucks that was due to take effect on October 1, before being delayed by a month.
Recent weak employment data has been enough for the Federal Reserve to conclude it must lower interest rates to support hiring. Investors now put the odds at more than 80% that the central bank will announce at least two more rate cuts at its final two meetings this year. However, some Fed members also remain concerned about the pace of inflation, which remains well above the central bank’s 2% target. Carlyle also found that the inflation rate reached 3.3% in the service sector last month.
Worsening employment data is likely to exacerbate the bifurcated nature of the economy if lower rates continue to result in higher stock gains, Sosnick said. A lackluster “real” economy and a booming stock market “can coexist for quite some time,” he said. On Tuesday, the New York Federal Reserve said consumer expectations had deteriorated, with the outlook for both the labor market and inflation worsening.
However, Tuesday’s stock decline could be a warning. The market appeared to be derailed by a report from online news outlet The Information that questioned whether one of the key players in the recent AI breakthrough, Oracle, has the ability to successfully finance its commitment to buy chips from another AI heavyweight, Nvidia.
Some tech analysts were already concerned about the circular nature of the AI investment cycle, which has begun to give the impression that the same funds are simply being passed back and forth between the same handful of companies. An Oracle representative did not respond to a request for comment on the story.
Although the story focused solely on Oracle, Sosnick said it had brought down the rest of the market on Tuesday because it suggested that other companies whose stocks have benefited from AI could also be facing similar difficulties.
With the beneficiaries of the current economic environment already becoming increasingly limited, it wouldn’t take much for their fortunes to change to trigger a broader recession, said Mark Zandi, chief economist at Moody’s Analytics.
“It seems as if the economy is on the edge of a cliff, and it wouldn’t take much to push it over the edge,” he said. “It feels very fragile and vulnerable, and any little thing that doesn’t fit the script could cause a recession.”
