Suddenly, Wall Street is worried that the U.S. economy is more ‘vulnerable’ than it looks

Wall Street's view of the U.S. economy has shifted in recent sessions, with commentators pointing to weakening labor and business indicators despite a 13% year-to-date gain in the stock market, low unemployment and continued GDP growth. Bespoke Investment Group flagged that in the latest National Federation of Independent Business survey, small businesses increasingly cite poor sales as their "number one problem." The NFIB index fell to 97.9 in September from 98.7 in August. Pantheon Macroeconomics' Samuel Tombs and Oliver Allen said other business surveys also suggested activity lost some momentum toward the end of Q3, likely weighed by a rebound in global energy prices. They noted that only 411 companies responded to the NFIB survey, compared with around 1,200 a decade ago.

Moody's Analytics' Mark Zandi has described the economy as "vulnerable," focusing on the labor market. He told Goldman Sachs' Allison Nathan that payroll growth has averaged around 40,000 a month over the past year and is essentially zero excluding healthcare. He attributed the low unemployment rate partly to declining labor force participation, which he linked to retirements and low immigration. Zandi also warned that higher rates could hurt AI capital expenditure, arguing that a higher cost of capital and falling valuations could make it harder to fund the AI buildout. In his view, if rates remain at current levels or higher for more than a quarter or two, AI "could become the part of the economy that breaks."

Inflation data has reinforced those concerns. The consumer price index for September rose to 3.7% from 3.4% the previous month, above analyst expectations. Jamie Cox of Harris Financial Group said the inflation impulse was clearly energy-driven and that "two wars need to end before we get any relief." Pimco's Tiffany Wilding called the report "not a good data point" for the Fed, noting that committee members had signaled they were unlikely to raise rates later in the month. Following the release, markets priced in a 50% chance of a rate increase in October.

Equity and bond markets reacted sharply. Tech stocks sold off globally, with South Korea's KOSPI falling 8% and triggering a trading halt, Japan's Nikkei 225 down 4.90%, CoreWeave down 15.46% and Oracle down 8.83%. The selling occurred despite positive news, including TSMC's Q3 earnings beat and guidance for higher capex over the next two years, Apple's record close and its status as only the second company after Nvidia to reach a $5 trillion market cap, and Anthropic's report of adjusted profitability on $17 billion in Q3 revenue, which appeared slower than previously estimated. The 10-year Treasury yield peaked at 5.32% before falling back to 5.08%. Brent crude traded at $106 per barrel and Bitcoin fell to $81,265.