Amidst growing concerns over a cooling job market and the looming threat of increased unemployment in the United States, one might expect panic in financial markets. Yet, quite the opposite is occurring. Last week, the Dow Jones Industrial Average and the S&P 500 soared to unprecedented heights, setting new records.

Across the pond, the situation appears grim with the economy shrinking, largely attributed to the perceived mishandling by the Chancellor. Despite this, the FTSE 100 index, while experiencing minor fluctuations, remains impressively up by 17 percent this year. The question that arises is: why are the markets thriving?

The answer lies in an often-overlooked economic principle. In the short term, rising unemployment can boost stock prices. This seemingly paradoxical trend occurs because a weaker job market typically prompts central banks to lower interest rates to stimulate economic activity. Such was the case with the Federal Reserve’s recent decision, and it’s anticipated that the Bank of England will follow suit soon.

Reduced interest rates result in more available capital, some of which inevitably flows into the stock market, driving up share prices. Additionally, while increased liquidity can lead to inflation, stocks offer a buffer against inflationary pressures, unlike bonds.

However, this is just one facet of the situation. Given the global economic challenges, particularly those stemming from the disruptive tariff conflicts instigated by former President Donald Trump against longstanding trade partners, the resilience of share prices is even more intriguing. So, why are share values defying expectations and continuing to grow?

But that is only part of the story. Why have share prices been so strong, given all that has been thrown at the world economy, especially the disruption from Donald Trump’s tariff war against the US’s established trading partners?

What’s up?: The FTSE 100 index had  a bit of a wobble, but it is still up 17 per cent on the year

One answer is to say markets are deluded, that this is a bubble, and it’s going to pop. A lot of people in Britain believed the scare stories and have been net sellers of shares right through 2025.

It’s true that all bull markets must come to an end, but very often the best returns come in their final months. People who sold too soon will have missed out on those extra profits, while the ‘buy-on-the-dip’ crowd will have done very well.

There are two other elements that help explain what has happened, which taken together give some pointers to the future.

One is the extraordinary extent to which the potential of artificial intelligence has mesmerised investors. The other is the resilience of the rest of the world economy against all the stuff that has been thrown at it.

The basic point about AI is that the investment requirements are so huge, and the valuations so extreme, that at some stage investors will baulk at pumping more funds into the industry.

We had a glimpse of those concerns last week when the quarterly results from software developer Oracle failed to ease worries that it had become too dependent on one customer – OpenAI. Its shares are now nearly 40 per cent down on their September peak, when the firm’s co-founder Larry Ellison briefly passed Elon Musk to become the world’s richest man. Other AI-related stocks have weakened too, though far less dramatically.

The message for investors is: ‘Yes, of course AI will change the world and we have made shed-loads of money, but let’s trim our commitment and stick some of our profits in other, more boring but less volatile enterprises.’

The process is called rotation, as investors move out of high-growth stocks into basic sectors such as banking, energy, defence and consumer goods.

That leads to the second part of the explanation for what is happening. While the world economy is still growing, these basic industries can make juicy profits.

We know a serious recession will come at some point because there is such a thing as the global economic cycle and we don’t seem to be able to do anything about it. But meanwhile there are sound investments to be made.

That is where UK stocks come in. The FTSE 100 companies get three-quarters of their sales from overseas, either from foreign subsidiaries or from exporting.

And some 65 per cent of those firms are owned by overseas investors, maybe more because the figures are out of date.

So for those foreign investors what happens to the UK economy is not that important, nor is the fact that we here are being clobbered with higher taxes.

The Footsie is a sterling-denominated bet on the world economy and as such looks still to be pretty decent value. If more money comes out of AI-related US businesses, expect quite a few billions to be invested in UK-based firms.

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