Why US stocks rally as the economy slows

U.S. stock indexes are trading near record levels in 2026, led by a narrow group of companies that supply hardware for artificial intelligence, including makers of graphics processing units and high-bandwidth memory. Technology and related companies now represent roughly half of the market’s weight, lifting headline indexes even as most sectors show limited gains.

The broader U.S. economy is expanding at about a 2% annual pace. Hiring is at multi-year lows and labor force participation remains below pre-pandemic levels. Inflation has not returned to target and measures of consumer confidence have weakened, factors that have kept household spending cautious.

Spending has become concentrated. The top 20% of earners account for nearly 60% of personal consumption, reflecting stronger asset gains among wealthier households and weaker wage growth for lower- and middle-income groups. Economists describe this as a K-shaped pattern where different income groups move in opposite directions.

Mark Zandi, chief economist at Moody’s, described the state of the economy this way: “We’re growing. We’re not in recession. But we’re not going anywhere quickly.”

Analysts point to the concentrated rally in AI-related hardware as the main reason markets and the real economy appear disconnected. Firms that produce GPUs and HBM chips have seen rapid revenue gains and higher valuations based on expected future demand, even though those firms account for a limited share of total U.S. output.

Economists warn that a sustained fall in valuations for the recent market leaders could reduce the wealth effect that supports spending among high earners, which would weigh on aggregate demand. Some economists say the opposite is possible: wider adoption of AI could raise productivity, prompt larger-scale hiring, lift wages and encourage more business investment, which would spread gains beyond the current narrow group of companies.

Policymakers, investors and firms will monitor whether AI-driven investment and hiring broaden in the back half of 2026. The path of corporate spending and labor-market responses will influence whether stock-market gains and economic activity move closer together or remain divergent.