US stocks surged in the first half of 2026 while the US economy's trajectory remained tepid, creating a disconnect that economists characterize as comparing apples and oranges. The S&P 500 rose nearly 10% and the Dow Jones Industrial Average climbed almost 9% in the first half of 2026, marking the Dow's best first-half performance since 2021. This divergence stems from artificial intelligence companies driving stock valuations skyward while real GDP growth decelerated from about 3.3% in 2023 to roughly 1.9% so far in 2026, according to Joe Seydl, senior markets economist at J.P. Morgan Private Bank. The labor market shows weakness with labor force participation near its lowest level in about 50 years outside the Covid-19 pandemic, and consumer sentiment tumbled to a record low in May amid inflation fears.
S&P 500 and Dow Jones Post Strong First-Half Gains as GDP Growth Slows
The S&P 500 US stock index rose nearly 10% in the first half of 2026. The Dow Jones Industrial Average climbed almost 9% over the same period, its best first-half performance since 2021. Those gains follow the S&P 500 rallying 24% in 2023, 23% in 2024 and 16% in 2025, the second best three-year win streak since 2000.
President Donald Trump cited the stock market's strength as a contributor to his soaring wealth after returning to office for a second term, following the release of a mandatory financial disclosure form last week.
Meanwhile, real US gross domestic product, a measure of economic output after inflation, has decelerated from about 3.3% in 2023 to roughly 1.9% so far in 2026, Seydl said. Mark Zandi, chief economist at Moody's, characterized GDP growth around 2% as soft, though roughly flat from last year.
Federal Reserve officials in June estimated the economy would grow at a 2.2% pace in 2026. Consensus among economists is largely concentrated around a 2% growth forecast for the year, Zandi said.
The labor market is showing weakness, Zandi said. Labor force participation is near its lowest level in about 50 years outside of the Covid-19 pandemic. Employers are hiring at their slowest pace in more than 10 years, excluding the pandemic. Long-term unemployment has risen steadily.
Consumer sentiment tumbled to a record low in May amid fears of higher inflation, according to the University of Michigan's Surveys of Consumers. Sentiment rebounded somewhat in June, though remains unfavorable, it said.
AI Sector Concentration Drives Stock Market Performance
Artificial intelligence is the main reason for the divergence between stocks and the economy, economists said. The stocks of AI companies have gone skyward and buoyed the broader stock market, Zandi said.
Technology accounts for about 35% of the stock market, and roughly 50% when considering an expanded technology group that also includes Alphabet, Amazon, Meta and Tesla, which are classified as consumer companies but trade like Big Tech, Seydl said.
Stocks generally trade based on future expectations of company performance, and investors are bullish on the earning potential of technology companies, particularly those in the AI realm. The rise in earnings has been concentrated in the major big-tech firms, especially the semiconductor companies and hyperscalers that underpin AI infrastructure, Capital Economics said in a July 1 research note.
Hyperscalers like Microsoft, Amazon and Oracle provide cloud computing infrastructure, while semiconductor companies like Intel, TSMC and Samsung manufacture AI chips, it said. Those two sets of companies account for almost two-thirds of the growth in S&P 500 earnings since the end of 2022, shortly after OpenAI released its free version of ChatGPT to the public.
Technology only accounts for about 10% to 15% of the US economy, Seydl said. The US economy is instead powered by consumer spending, which makes up about 70% of GDP.
Top 20% of Households Account for Nearly 60% of Consumer Spending
While consumer spending remains strong, it is increasingly propped up by high-earning households, a dynamic that threatens to sink the economy if things go sideways, economists said.
Households in the top 20%, those with incomes of about $200,000 or more, account for nearly 60% of personal outlays, up from about half in the early 1990s, according to a Moody's analysis published in June and authored by Zandi.
Spending among the top 20% grew by about 4% after inflation in Q1 2026, while that of the bottom 80% was unchanged, he wrote. This K-shaped dynamic has persisted since the pandemic.
Wealthy households hold the vast majority of stocks and tend to spend more liberally when the market is booming due to the wealth effect: they feel richer and spend more as a result.
If investors were to sour on the AI investment thesis and the stock market were to suffer a prolonged drawdown, it could be bad news for the economy if the wealthy pull back on spending, economists said. There are also pressures beyond AI, such as the prospect of war resuming between the US and Iran. Inflation also remains well above the Fed's target, pressuring household budgets.
FAQ
Why are US stocks rising while economic growth slows in 2026?
Artificial intelligence companies are driving stock market gains. Technology accounts for about 35% of the stock market, and AI-related firms including semiconductor companies and hyperscalers account for almost two-thirds of S&P 500 earnings growth since the end of 2022. Meanwhile, technology only represents 10% to 15% of the US economy, which is powered by consumer spending at 70% of GDP.
What is the current state of the US labor market in 2026?
The labor market is showing weakness. Labor force participation is near its lowest level in about 50 years outside the Covid-19 pandemic. Employers are hiring at their slowest pace in more than 10 years, excluding the pandemic. Long-term unemployment has risen steadily.
How is consumer spending distributed across income levels in 2026?
Households in the top 20% with incomes of about $200,000 or more account for nearly 60% of personal outlays, up from about half in the early 1990s. Spending among the top 20% grew by about 4% after inflation in Q1 2026, while that of the bottom 80% was unchanged.
