The Mirage of the Market: Why Highs Don’t Mean Broad Prosperity

by Kent O. Bhupathi

Earlier this year, John, a seasoned professional with a major firm, decided it was time for a leap. The stock market had been climbing steadily, financial headlines were full of optimism, and investor sentiment seemed to signal a revitalised economy. And John was getting increasingly tired of feeling left out. So, convinced that growth had returned, he left his stable job to join a consumer–facing start‑up.

Six weeks later, John was unemployed.

The start‑up’s sales projections were built on an assumed rebound in household demand, but real personal consumption expenditures had stalled. Delinquency rates on credit‑card loans were climbing toward the highest level recorded since the early 2020s, and unemployment‑insurance claims had been trending upward since April. Meanwhile, corporate profits after tax had registered their first significant drop in more than two years, and real exports had flattened.

John’s decision was shaped by a popular narrative: when equities rise, the economy must be healthy. That narrative is both persistent and dangerous.

The Market Is Not the Economy

The phrase “the stock market is not the economy” has been repeated so frequently that it risks becoming white noise. But it matters, especially now. In moments of crisis or transition, when people and institutions look for indicators to guide their decisions, this confusion becomes more than a semantic issue. It becomes a source of real-world missteps.

In theory, the stock market reflects investor expectations of future economic performance. In practice, it reflects a cocktail of sentiment, speculation, central bank policy, and corporate profitability. It tends to concentrate on the fortunes of a small group of powerful firms, while ignoring the broader terrain of the labor market, household finances, and small business vitality.

For example, in 2020, while millions of Americans were still out of work and food insecurity rose sharply, the S&P 500 and other indices soared to record highs. This was not an aberration. Historical patterns show that financial markets and the broader economy often move on different timelines, and sometimes in completely opposite directions.

Why the Disconnect Exists

1. The Market Reflects a Narrow Slice of Economic Activity

One of the clearest reasons for the disconnect is representation. Publicly traded companies, particularly large-cap firms in tech, energy and finance, account for most of the stock market’s weight. Although these firms dominate capital markets, they are playing a diminishing role in employment and local economic activity.

The real economy, by contrast, depends on services, healthcare, education and small businesses, sectors that are underrepresented or entirely absent from major indices. As of 2020, only about 3.6% of workers in the education and health services sectors were employed by publicly listed companies. A recent NBER study documents a sharp downward trend in how closely a firm’s market valuation tracks its U.S. employment footprint. In the 1950s, companies such as GM and AT&T employed hundreds of thousands domestically; today, companies such as Apple and Alphabet dominate the indices while employing far fewer workers per dollar of market value.

This structural shift means that when the market rallies it often lifts firms whose success has little to do with the economic well-being of most households. A rising index can conceal deep fragility in the sectors where most people work.

2. Labor’s Share Shrinks as Profits Soar

Stock prices are driven largely by expectations of corporate profits. Over the past few decades, those profits have risen not because the economy expanded evenly but because companies became more efficient at directing value to shareholders rather than to workers.

Research shows that since 1989, roughly 43% of the real increase in the stock market can be attributed to what economists call “shocks that reallocated the rewards of production.” In plainer terms, companies boosted shareholder value by cutting labour costs. They did so through offshoring, automation, stagnating wages, and cost-cutting instead of through genuine investment or growth in output.

This dynamic helps explain how the market can flourish even when wage growth is weak. In fact, the very things that push the market higher, such as wider margins, stock buybacks and lower labour costs, can undermine the economic health of the broader population.

3. Easy Money and Central Bank Policy Inflate Valuations

Since the Great Recession, the Federal Reserve has played an increasingly outsized role in supporting asset prices. By cutting interest rates and engaging in quantitative easing, the Fed has created a financial environment in which investors are pushed toward equities, driving up valuations regardless of underlying economic performance.

During the COVID-19 crisis, this trend was on full display. Even as unemployment spiked and small businesses shuttered, the Federal Reserve’s interventions fueled one of the fastest market recoveries in history. An IMF analysis concluded that the primary driver of 2020’s equity surge was the Fed’s suppression of discount rates, which inflated the present value of future earnings.

A Federal Reserve study found that from 1989 to 2019, falling interest expenses and corporate tax cuts mechanically accounted for over 40% of U.S. corporate profit growth. These policy tailwinds benefitted stocks much more directly than workers or local economies.

4. Markets Often Move on Hope, Not Evidence

Unlike economic indicators, which are backward-looking, the stock market prices in future expectations. Investors often respond more to what they believe will happen than what is currently unfolding. This introduces a large degree of speculation.

Markets rose in 2020 not because economic fundamentals improved, but because investors believed in a swift recovery. Vaccine rollouts, fiscal stimulus, and pent-up demand became narratives that pushed stock prices higher, even as real GDP, employment, and small business activity remained sluggish.

The risk here is that people begin to interpret the market’s forward-looking optimism as evidence of current strength. That mistake led John, and many others, to make decisions that did not align with actual conditions.

The Real-World Consequences

For individuals, the consequences of this misunderstanding can be severe. John read the market’s strength as a signal of economic momentum, and he was not alone. Each time financial media headlines celebrate stock gains without context, a narrative takes shape that can push people to overextend themselves: leaving jobs, taking on debt, or making risky investments.

For the economy as a whole, the disconnect weakens the link between capital markets and productive activity. When stock gains stem from monetary policy, tax arbitrage, or speculation rather than real investment, just to name a few, markets no longer serve as accurate indicators or useful allocators of capital.

Moreover, the distribution of gains remains deeply unequal. The top 1% of households own more than half of all stocks, while the bottom 50% own less than 1%. As a result, the wealth generated by stock rallies accrues almost entirely to those already well off; most workers see no direct benefit. Just… let that sink in.

Plain and simple, this dynamic regularly undermines the social contract. And when markets thrive while wages stagnate, distrust grows. Then economic policy truly tilts toward asset holders, and those without capital are left behind.

The three panels show an economy that has shifted from climb to glide. Business applications rose through 2023, rolled over in early 2024, then merely steadied, which signals cooling entrepreneurial momentum instead of a renewed surge. Real personal consumption kept advancing until early 2025, but the line now flattens, so households are holding spending levels rather than extending them. Continued unemployment claims keep inching higher, pointing to a labor market that is loosening slowly instead of tightening. All of this is happening while the stock market keeps printing new highs amid greater policy and geopolitical uncertainty and softer macro data. Equity prices are riding liquidity, outsized gains in a few mega-cap tech firms and expectations of easier policy, none of which requires broad-based real growth in the near term. The result is a widening gap between what Wall Street is pricing and what “Main Street” is feeling (and signaling).

Rethinking the Dashboard

So what should we look at instead?

We should watch real employment-to-population ratios. We should monitor real personal income excluding transfer payments. We should track business formation rates, delinquency trends on household debt, and access to credit for small and mid-sized enterprises.

These indicators offer a clearer picture of whether growth is inclusive, sustainable, and resilient. The stock market can be one signal among many, but it should not be the loudest or the most trusted.

The Honest Economist is building an open-access dashboard of this kind and will share it soon. In the meantime, you can create your own using free and accessible tools, such as: https://fredhelp.stlouisfed.org/fred/account/dashboard-features/new-dashboard/

Conclusion

John’s story is a warning, not because he stumbled, but because the system around him invited a faulty reading of the landscape. He treated a rising index as a safety signal and learned that the light it cast did not point to stability.

After all, the stock market is a sentiment machine. It runs on narratives, projections and confidence. It can illuminate possible futures, yet it just as easily distorts present realities.

If we equate a booming market with a healthy economy, we risk misreading the moment. When households, businesses and policymakers all take their cues from that illusion, the damage spreads.

So the next time someone says, “The market is up,” the first response should not be celebration. It should be a question: “For whom?”

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