An old saying in investing and policymaking circles serves as a reminder that the markets are not the economy. While the former tracks profits and expectations, the latter is concerned with tangible matters, from jobs and wages to GDP. Often, the two can present a similar narrative, but there are also instances when they become disjointed, and the economy gets entangled with the vagaries of financial markets.
According to Mark Zandi, the prominent chief economist at Moody’s Analytics, we are currently in one of those situations.
“I seldom comment on financial markets as they generally reflect and are largely in line with economic conditions. However, there are times when I believe markets are overdone and increasingly detached from the economy,” Mark Zandi wrote on a Sunday.
The disconnect Zandi is referring to has left many analysts puzzled over the past year. While financial markets have performed well, including stocks as well as commodities like gold and silver, the overall economy appears to be in a bit of a slump and has shown several warning signs. As the disconnect widens, driven by high valuations and increasing speculation in financial markets, Zandi cautioned that the real economy could be stifled.
Real GDP growth in the U.S. dropped to just 1.4% in the last quarter of 2025, down from 4.4% in the previous quarter, the Commerce Department announced last week. This pace is below the economy’s potential of around 2.5%, Zandi wrote, indicating unsustainable momentum. Job market indicators further highlight the rift. Unemployment edged down slightly to [a certain rate] from 4.4% in December, and employers [did something in January], but the revised 2025 estimates released this month suggested [employment situation] at all last year.
Those factors do not paint a particularly optimistic economic picture. But in the background, financial markets keep outperforming expectations. Fueled by strong returns last year, expected rate cuts, and the hype around artificial intelligence, many analysts predict 2026 to be another great year for assets. Researchers from Goldman Sachs, for example, expect the S&P 500 to [perform a certain way] this year.
The disconnect risks a sharp reversal. If stocks decline—say, high valuations don’t materialize, and the tech-heavy U.S. stock indexes are hit—wealthy households could cut back on spending, hitting GDP. As Moody’s estimated last year, the top 10% of earners in the U.S. account for around [a certain percentage]. Should that activity dry up, it could lead to businesses scaling back and an economic contraction.
If everything depends on markets continuing to perform well, it could be a bad sign for everyone involved with the U.S. economy. “Financial markets seem increasingly precarious to me, with the elements for a significant selloff falling into place,” he wrote.
According to Zandi, markets have been “increasingly contaminated by speculation,” resulting in today’s high and potentially troublesome valuations. Technology giants—the five largest of which currently account for [a certain percentage] of the S&P 500’s value—have poured billions into AI-related investments over the past year, although much of that spending is based on the hope that future ROI will justify it. That might be the case, but for many investors, the strong returns over the past few years are reassuring enough, according to Zandi.
“Investors are simply investing on the belief that prices will rise rapidly in the future because they have in the recent past,” he wrote.
The danger of this disconnect is not just a loss of paper wealth for investors. Zandi warned that a market collapse would actively endanger a fragile economy, as consumer spending dries up and businesses become more cautious. External shocks, such as renewed uncertainty over the Trump administration’s tariffs or the possibility of a military strike against Iran, could also worsen the economic situation.
Sometimes markets and the economic reality on the ground are in sync. As business fundamentals improve, so do their valuations, and that can lead to more hiring and higher wages. But with the economy now struggling for momentum and markets soaring on unstable ground, the story of this moment of disconnect could be very different, according to Zandi.
“Markets risk moving significantly, causality is reversed, and falling asset prices threaten an already vulnerable economy. This is one of those times,” he wrote.