Why Stock Market Bulls Are Laughing Off a Slowing Economy in 2025

Wall Street's ironclad optimism defies gravity—again. While Main Street braces for recession tremors, the S&P 500 keeps moonwalking to fresh highs. Here's the dirty secret propping up the party.

The Fed Put Never Left the Building

Powell's printer might be idle, but traders still price in emergency rate cuts by Q4. Liquidity junkies know the playbook: weak data = faster pivot = risk asset euphoria. Classic 'bad news is good news' alchemy.

AI Tokens Eat the World (And Your Job)

Tech mega-caps now account for 35% of index weight—their AI hype cycles drown out macro noise. When NVIDIA's CEO sneezes, it moves markets more than GDP prints.

Corporate America's Financial Engineering 101

Buybacks hit $1 trillion annually as CEOs weaponize cheap debt. Why invest in capex when juicing EPS gets you that golden parachute faster?

The music keeps playing... until the SEC finally audits those 'AI revenue' claims. But hey—this time is different, right?

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Besides the dour jobs report, investors also learned that the S&P 500 is pacing for year-over-year earnings growth of 10.3%, well above the 5% expected entering the reporting period, per FactSet data.

On top of that, we heard Big Tech giants say they're set to spend another $364 billion in AI investments during 2026, and third quarter earnings estimates for the S&P 500 weren't slashed during the first month of the quarter for the first time in over a year.

In other words, while the US economic growth story is taking hits, the fundamental driver of the AI-driven bull market is absolutely cooking. That made Mike Wilson and the equity strategy team at Morgan Stanley declare "we’re buyers of pullbacks," and that the team is bullish over the next 12 months.

"While there's risk in the near-term, we are gaining confidence in our 12-month bullish view fueled by better earnings/cash FLOW growth," Wilson wrote. "The drivers include positive operating leverage, AI adoption, dollar weakness, cash tax savings from the [One Big Beautiful Bill], easy growth comparisons, and pent up demand for many sectors in the market."

BlackRock's Investment Institute, led by Jean Boivin, wrote in a weekly market commentary note that there is a clear "tug-of-war" between the economic drag of tariffs and US corporate resilience driven by AI.

They, too, are taking their signal from the latter.

"Questions remain about who will pay for tariffs," Boivin's team wrote. "Early signs indicate a mix of consumers and companies. We think US corporate strength could cushion the blow and stay overweight the AI theme and U.S. stocks."

In a research note summing up earnings reports seen from more than two-thirds of S&P 500 companies this quarter, Bank of America Securities head of US equity and quantitative strategy Savita Subramanian wrote that the "AI arms race is alive and well."

To Subramanian, the focus on AI growth continuing to inflect higher isn't all about tech stocks either. It could be a tailwind for a broadening of the stock market rally and support US economic growth.

"Increased power usage from AI and the physical build out of data centers should also lead to more demand for electrification, construction, utilities, commodities, etc, ultimately creating more jobs."

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.