The economy no longer drives your returns, and AI may widen the gap

What if the most-watched economic data of the week tells you almost nothing about your portfolio? That is the uncomfortable idea behind a MarketWatch piece arguing that the economy's declining correlation with the stock market is a "profound development," and that AI may very well accelerate it. We think that's right, and it has practical consequences.

The gap is not new. Commonwealth noted back in 2021 that U.S. GDP fell 3.4 percent in 2020 while the S&P 500 rose 18.4 percent. What is different now is that the disconnect is no longer a one-off pandemic quirk. According to Chase, all three major U.S. indexes have hit fresh record highs in 2026, though not in lockstep. And MarketWatch has described the market as increasingly a story of "AI" versus "non-AI."

GDP is a headline; earnings are the engine

This week's calendar shows the tension. A Fed decision lands October 28 and third-quarter GDP on October 29, but so do earnings from Microsoft, Alphabet and Amazon. In our view, the earnings reports will matter more to your returns than the GDP print.

Stocks are claims on profits, not on national output. When a few giant companies produce a large share of those profits, the broad economy can wobble while the index doesn't. Goldman Sachs Research put a number on it: top tech stocks accounted for 53% of the S&P 500's return in 2025, and concentration of market cap in a handful of tech companies is the highest on record.

Profits are also strong. FactSet's preview shows analysts calling for 32.4% earnings growth for calendar 2026, and a Goldman Sachs research note says S&P 500 trailing return on equity hit a record 22% in the first quarter. Those are forecasts and estimates, not guarantees, but they help explain why the index can climb whatever the jobs report says.

Our reading: a strong economy used to be a decent proxy for strong profits. Today the proxy looks broken, because profits come from a narrow slice of firms whose fortunes depend on AI spending, not on how the average household feels.

AI widens the gap, and it cuts both ways

If AI keeps concentrating earnings, the divergence grows. That's the bull case. The bear case is the same fact seen from the other side: you are depending on a few companies to keep delivering.

Goldman's strategists flagged that hyperscaler capital spending was roughly $400 billion in 2025, nearly 70% more than in 2024, and on track to reach 75% of cash flows, similar to the late 1990s. They also said the S&P 500 traded at a forward P/E of 22x, matching the 2021 peak and approaching the record 24x of 2000. Those were January figures, so check current levels before leaning on them.

Recent sessions show how fragile sentiment is. Schwab reported that the semiconductor index fell 6.7% in one day, and that investors sold even after ASML and Taiwan Semiconductor delivered "beat and raise" quarters. Schwab's Nathan Peterson said this conveys that the AI trade is perceived as too risky right now. Good news did not rescue prices. In our view, that is what a richly valued, concentrated market looks like.

What to do instead of watching GDP

This is not investment advice, and your situation is your own. But as a way of thinking, we'd swap three habits.

First, stop trading on macro releases. We doubt a weak jobs number means falling stocks, or that a strong one means rising ones. Macro still matters through interest rates and yields (the 10-year Treasury yield recently sat near 4.95%, down from two-decade highs above 5.36%, per Schwab), but that's a channel through valuation, not a verdict on growth.

Second, look at what you actually own. If you hold an S&P 500 index fund, you probably hold a big bet on a handful of AI-linked firms, whether you intended to or not. Knowing that is half the work.

Third, respect valuation. High multiples don't tell you when a market will turn, but as Goldman's Ben Snider put it, elevated multiples "increase the magnitude of potential equity market downside if earnings disappoint expectations." That is the sentence to remember.

The verdict: the economy hasn't become irrelevant, it has become a worse guide. Watch earnings quality, concentration and what you pay for them. Diversification won't guarantee a profit, but at least it keeps one company's earnings call from deciding your year.