Strong earnings growth can fuel the equity market even when the Federal Reserve is on hold, meaning rate cuts are not a prerequisite for solid returns. The more significant and immediate risk is a liquidity crunch, where the private economy's capital needs for investment and recovery outstrip supply from the Fed and Treasury.
While the S&P 500's price decline was under 10%, its forward P/E multiple fell 18% as earnings rose. Concurrently, nearly half of the Russell 3000 stocks saw drawdowns of 20% or more. This indicates the market was actively discounting risks, contrary to a surface-level narrative of complacency.
The narrative of AI causing mass layoffs is premature. Instead, its immediate benefit is indirect: companies are using the prospect of AI to justify leaner operations and slower hiring. This 'apprehension to overhire' boosts profitability before widespread AI adoption delivers direct efficiency gains.