How Can Stock Markets Be Hitting All-Time Highs?

By Haddon Libby

Many wonder how the stock market can be reaching all-time highs in spite of the war with Iran, higher prices and lean financial times for a growing majority of Americans.  It seems contrary to logic. The answer lies in how the economy actually works.

Consumer spending makes up about two-thirds of the U.S. economy. When people buy groceries, cars, clothes, and services, it drives growth. Right now, spending continues although in a lop-sided way. Higher-income households, who own most stocks and have benefited from rising asset prices, continue spending strongly. They account for the lion’s share of total dollars spent. Meanwhile, lower- and middle-income families struggle to keep up with higher prices for food, housing, and gas. Consumer sentiment is low, yet overall spending stays just positive enough to avoid a recession.

The Iran conflict added real pain. Fighting in the region threatened oil flows through the Strait of Hormuz. Fertilizer shipments which are critical to global farming were disrupted causing prices to move higher. Farmers worldwide face bigger costs, which eventually means higher food prices at the grocery store. In Asia, factories dealing with energy shortages and higher shipping costs have slowed down. These ripples affect supply chains for everything from electronics to packaged goods.

So why isn’t the market crashing? Because stock prices reflect expectations for future corporate profits, not the average person’s weekly budget. The S&P 500 is dominated by a small group of giant companies, especially in technology. These firms earn money globally, sell to businesses, and invest heavily in growth areas that can withstand the challenges caused by the war.

Enter the AI revolution. The massive buildout of data centers and artificial intelligence infrastructure is reshaping the economy right before our eyes. Amazon, Microsoft, Google, Meta, and others are spending hundreds of billions of dollars this year on new AI servers, chips, power plants, and buildings. This creates jobs in construction, steel, electrical equipment, and energy. It boosts profits for chipmakers like Nvidia and supports related industries.

This AI capex spending is a new industrial boom. It has contributed a large chunk of recent U.S. economic growth. While consumer spending feels sluggish for many, this investment surge lifts corporate earnings and stock valuations. Markets look forward as investors bet that AI will deliver big productivity gains and new revenue streams in the years ahead.

The result is a “K-shaped” economy. The top thrives with wealth from stocks, salaries, and AI-related efficiency improvements. Many others face flat to declining wages, higher costs, and uncertainty caused by $6/gallon gas. Stock ownership remains concentrated—roughly half of Americans own stocks at all, and the richest 10% own the vast majority.

This disconnect is not new. Markets have risen during past conflicts when the damage stayed contained. The current Iran situation caused an initial spike in oil and fertilizer prices, but ceasefires and falling energy costs from peaks have calmed some fears. Investors focus on resilient U.S. corporate strength rather than broad household struggles.

Still, risks to the stock market remain. If the war escalates again, food inflation could spike and squeeze consumers to the breaking point. Power shortages from data center demand might slow the AI buildout. If AI hype outruns actual results, spending could pull back.

In the end, today’s market highs show how modern economies can have strong pockets even when the overall picture feels mixed. The AI transformation is genuinely powerful and is creating real economic activity. But it also highlights growing inequality in who benefits. For the market to lift everyone more broadly, those productivity gains from AI will eventually need to show up in wider wage growth and lower living costs.

The same forces driving record stock prices could eventually ease pressures on families, or the gaps could widen further depending on how the war, inflation, and AI play out. Understanding this split helps explain why headlines about “booming markets” and personal financial stress can both be true at the same time.

Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management, a Fiduciary RIA firm.  For more information on our services, please visit www.WinslowDrake.com.  You can email Haddon at hlibby@winslowdrake.com.