The stock market is constantly trying to price in the future. That’s why stocks can sometimes rise even after weaker-than-expected economic data. Executive editor Joe Ciolli explains how investors…

Transcript

Ever seen a terrible economic headline and then watch stocks shoot higher? It feels backwards. But Wall Street isn’t always reacting to today’s news. The stock market is basically a giant prediction machine. It’s constantly asking one question. What will corporate profits look like in the future? At the end of the day, almost everything investors care about eventually comes back to earnings. More profits generally mean higher stock prices. So if a jobs report or manufacturing data comes in weaker than expected, investors aren’t just thinking that’s bad. They’re actually thinking. How will this change? What happens next? That weak economic data can increase the odds that the Federal Reserve cuts interest rates. And lower rates tend to be good news for stocks. Lower rates make it cheaper for companies to borrow, invest and grow. They can also encourage customers and businesses to spend more. If those lower rates help the economy avoid a slowdown, they can ultimately support future earnings growth. And that’s what investors are really trying to price in. Remember, markets don’t react to whether news is good or bad. They react to whether it changes expectations about the future. Of course, there is a limit. If the economic news is too bad or signals a serious recession, stocks usually won’t celebrate for long because earning expectations start falling. So the next time you see stocks rally on bad news, remember Wall Street isn’t cheering the bad news itself. It’s cheering what news might mean for interest rates and, ultimately, future profits. Read more about the stock market on Business Insider.