Why stocks have stalled while the economy grows

A growing economy and a rising stock market don’t always move together. The economy grew at a 3.4% annual pace last quarter, job openings rose to 7.52 million in September, and corporate profits hit a record in the second quarter. The S&P 500, meanwhile, has gone sideways since June, closing November 3 slightly below its June 2 level.

If the economy is stable or improving, more people working can mean more consumer spending, which can help companies grow sales and profits. Investors may be pulling back for reasons that have little to do with the economy. Five issues have dominated major media headlines over the past 60 days:

1. Midterm elections
2. Federal Reserve interest rate policy
3. The Iran war and its effect on oil and gas prices
4. Ukraine war
5. Stock market and jobs

Here is a look at each one and how much it matters for the stock market.

Midterm elections

LPL Financial’s November 3, 2026 daily research report, titled “The Worst-Kept Secret: Stocks Tend to Like Midterms,” made several points:

• Stocks have historically done well after midterm elections, regardless of who wins, as the policy outlook becomes clearer.
• From November through January, the S&P 500 has historically gained an average of 4.4% and risen 74% of the time, making it the best three-month period of the year.
• In the 12 months after a midterm election, the S&P 500 has been higher 19 straight times going back to 1950, with an average gain of 15.2%.
• Markets appear to expect a divided government, which may limit big moves after the election. Regulatory changes affecting banks, AI, data center construction, crypto, and health insurance are still worth watching.

The major indices have made little headway since June 2. The midterms may be good for stocks, and the market could pick up again after the election if LPL’s historical pattern holds.

Federal Reserve interest rate policy

Investors appear concerned about the impact on businesses and consumers if the Federal Reserve (Fed) raises interest rates again. Higher rates make borrowing more expensive for businesses and hit the housing market right away, since higher mortgage rates can price out buyers. The Fed has two main goals:

1. Stable prices, which it defines as 2% inflation a year
2. Maximum employment, though it has no set target for the unemployment rate.

Growth remains firm. GDP, the total value of the goods and services the economy produces, grew at a 3.4% annual pace in the third quarter, up from 2.2% in the second quarter, according to the first estimate from the US Bureau of Economic Analysis. Since the 2020 pandemic, GDP has grown in every quarter except the first quarter of 2022.

Too much growth and rising prices can work against the Fed’s first goal, stable prices. To slow rising prices, the Fed raises its benchmark interest rate. The Fed is looking for a Goldilocks economy, growing but neither too hot nor too cold.

The Fed’s willingness to raise rates suggests it sees the economy as strong. In addition, the higher the Fed can push rates now, the more room it has to cut them later if signs of a recession appear. Lastly, even with aggressive rate hikes in 2022 and 2023, a 0.25% hike in September, and no change at the October 28 meeting, the economy keeps growing at a solid pace, though slower than in 2021.

The Iran war and its effect on oil and gas prices

So far, the stock market does not appear to have been deterred by the Iran war. Oil, gas, and diesel prices have soared since February, yet the market appears only mildly concerned about what higher energy costs mean for corporate growth. Solid third-quarter GDP growth suggests high energy prices have yet to slow the economy. More importantly, corporate profits keep rising. During the second quarter, US corporate profits rose 7.7% from the first quarter to a record annual pace of $3.88 trillion, according to Trading Economics data from the US Bureau of Economic Analysis.

Third-quarter profit data is not out yet. Higher fuel prices may weigh on households and businesses, and I would expect some short-term hit to profits in the third and fourth quarters if energy costs stay high.

The price of US crude oil, known as West Texas Intermediate, has swung sharply this year with each headline about the Iran war and the Strait of Hormuz. After peaking near $123 a barrel in March 2022, it fell to about $56 by January 2026. The war sent it above $110 by early April, hopes of a resolution pulled it back to about $70 in July, and it now sits near $100.

Oil, gas, and diesel prices could fall meaningfully once ships can pass through the Strait of Hormuz for good, with or without a peace agreement with Iran. If oil returns to the $60s, lower energy costs could help corporate profits.

Ukraine war

The war in Ukraine is a tragedy for the people of Ukraine. My thoughts are with the civilians and families affected by the conflict. So far, the war does not appear to have changed how investors view US corporate growth. Defense spending tied to the war may also be providing some support to parts of the US economy.

Stock market and jobs

The US job market remains strong, with job openings holding steady in a range of roughly 7 million to 7.5 million during 2026. In September, employers had 7.52 million open jobs, up from a revised 7.19 million in August, according to the US Bureau of Labor Statistics. That is close to the highest levels of the four years before the 2020 pandemic. Layoffs fell to 1.64 million, the lowest since March 2025. Hiring slowed in September, with employers adding 29,000 jobs, and July and August were revised down by a combined 60,000.

The unemployment rate peaked at 4.5% in November 2025 and has eased since, though it ticked up to 4.2% in September from 4.1% in August.

The stock market has moved mostly sideways since June 2, with brief moves to new highs and recent lows that did not last. Including dividends, the S&P 500 finished November 3 about 0.1% below its June 2 level and about 3% below its October 6 record. The recent decline has brought it below its 20-day and 50-day moving averages, though it remains above its 200-day average. A moving average is the index’s average closing level over the past 20, 50, or 200 trading days, and investors use it to gauge the trend.

The Nasdaq Composite, home to many technology companies, has fared worse. Including dividends, it is down about 6% since June 2 and about 8% below its October 6 record. It sits below its 20-day and 50-day moving averages, though still above its 200-day average.

What does this mean for me?

In my view, most of the five topics in the headlines look temporary, and some may be resolved by early 2027.

Market leadership has shifted in the past six months. The S&P 600, an index of smaller companies, leads the major indices this year, up about 18.6% including dividends through November 2. Trailing it are the leaders of recent years, the Nasdaq and the S&P 500, which lean toward the largest companies. Both are pausing after several years of strong gains, and they could lead again in 2027, given how quickly many of their companies are growing earnings. I also think the recent pullback in technology and AI stocks may create opportunities for long-term investors, depending on their goals and risk tolerance.

Several planning deadlines arrive before December 31, including Roth conversions, charitable gifts, and contributions to workplace retirement plans. If you want to review any of them, or how this fall’s headlines affect your plan, schedule a time to talk.