Metropolitan Digital

  • Written by Jay L. Zagorsky, Senior Lecturer, Boston University

The world is on the brink of a recession[1], if all the breathless[2] headlines[3] are to be believed[4]. So why are U.S. stocks near all-time highs?

That’s a question my MBA students[5] have been asking me lately. Even the Federal Reserve is concerned – at least worried enough[6] to reduce U.S. borrowing costs for the second time this year.

Stocks are usually considered a barometer[7] of a company’s future prospects, so rationally you’d think market prices would be a lot lower if a recession were close at hand[8]. After all, recessions are a drop in economic activity, which means consumers and businesses are buying less stuff.

The answer to my students’ question[9] has a lot to do with profits and interest rates, but also “animal spirits.”

Moving in mysterious ways

Both the Dow Jones Industrial Average[10] and the Standard & Poor’s 500[11], Wall Street’s two main gauges for the U.S. economy, hit record highs in July and have been hovering near them ever since.

At the same time, signs[12] of trouble[13] for the global economy – and the U.S. – have been growing[14]. By Deutsche Bank’s reckoning, U.S. stocks should be 13% lower[15] than they are today.

But understanding exactly why stock markets move up or down is exceptionally difficult.

One of the greatest economists of all time, John Maynard Keynes, believed there were “animal spirits[16]” – essentially, emotions, instincts and other unquantifiable human behavior – that drove people to waves of optimism or pessimism, as he explained in his 1936 book “The General Theory of Employment, Interest and Money[17].”

Keynes believed these “spirits” had a huge influence on financial market prices and conditions. But beyond these mysterious movements there are two primary factors that push overall stock prices up and down: profits and interest rates.

Profit sharing

The value of a public company and its shares is based on its profits.

Profits are just the difference between a business’s sales and its costs. Buying shares in a company gives the buyer a claim on a portion of these profits. During an economic expansion, profits go up[18]. During a recession, profits for most companies go down.

Stock prices are directly related to profits because when profits rise companies have more money to give out to shareholders in dividends. This makes stocks more valuable.

Rising profits also mean companies have more money to buy back their own shares[19], which leaves fewer available on the open market. This reduction pushes stock prices up because each one now gets a slightly larger share of profits.

The impact of a share buyback is no different from what happens when any kind of product becomes hard to find. Sellers see lots of demand while they have relatively little product to supply. To balance this excess demand, they raise prices.

During recessions, companies’ profits fall[20]. Less profit means lower dividends and less money for share buybacks. Both of these reduce share prices since there is less incentive to invest.

Wall Street is ignoring the omens of recession – here's why Federal Reserve Chair Jerome Powell has been easing monetary policy in recent months. AP Photo/Kiichiro Sato[21]

The impact of interest rates

The connection between profits and stock market prices is fairly easy to understand. Interest rates, on the other hand, are a bit less straightforward but are just as potent at driving stock prices.

In simple terms, stock prices are inversely related to interest rates. When interest rates fall, stock prices usually go up[22]. And when rates rise, stock prices tend to fall.

Interest rates have this effect because many companies borrow money[23] to operate their business. When interest rates fall, it costs less to run the company since businesses pay less to service their debts, boosting profits. On the other hand, when rates rise, costs go up, squeezing corporate earnings.

Lower interest rates also boost the share prices of companies that don’t borrow money because they increase the present value[24] of their future profits. This is why money earned tomorrow is worth less than money earned today.

The simplest way to see this is to imagine winning a million dollars[25] right now. You’d be a lot less thrilled, however, if you were told you wouldn’t receive a dime for 25 years. And so lotteries typically let winners take a greatly reduced lump sum[26] immediately or receive the total in smaller payouts over many years.

It’s the level of interest rates that determine just how much future income is worth today. Higher rates reduce the value of future prizes and profits; lower rates increase it.

What occupies Wall Street

To understand why stocks keep going up, we have to consider what profits and interest rates are doing, and what Wall Street traders are focused on.

Corporate profits, which have been hitting their own record highs[27] in recent years, are currently stagnating[28] and are forecast to dip as a result of the trade war[29].

However, central bankers around the world are also worried about a recession. They are working hard to prevent this recession by driving down interest rates now. For example, the European Central Bank on Sept. 12 cut a key interest rate[30] and took other steps to ease borrowing costs for companies and businesses. And the Fed is expected to follow suit[31] on Sept. 18.

Lower interest rates encourage consumers, businesses and governments to borrow and spend more money – and boost the value of stocks. Although some investors are concerned about a recession, apparently most believe actions by the Fed and other central banks will be enough to keep the global economy humming – or at least enough to keep corporate profits high.

How long will the rising stock market continue? Who knows. But that’s what makes following financial markets so interesting for academics and so frustrating for individual investors.

[ Deep knowledge, daily. Sign up for The Conversation’s newsletter[32]. ]


  1. ^ brink of a recession (
  2. ^ breathless (
  3. ^ headlines (
  4. ^ believed (
  5. ^ MBA students (
  6. ^ worried enough (
  7. ^ usually considered a barometer (
  8. ^ recession were close at hand (
  9. ^ my students’ question (
  10. ^ Dow Jones Industrial Average (
  11. ^ Standard & Poor’s 500 (
  12. ^ signs (
  13. ^ trouble (
  14. ^ have been growing (
  15. ^ should be 13% lower (
  16. ^ animal spirits (
  17. ^ The General Theory of Employment, Interest and Money (
  18. ^ profits go up (
  19. ^ more money to buy back their own shares (
  20. ^ During recessions, companies’ profits fall (
  21. ^ AP Photo/Kiichiro Sato (
  22. ^ stock prices usually go up (
  23. ^ many companies borrow money (
  24. ^ increase the present value (
  25. ^ winning a million dollars (
  26. ^ take a greatly reduced lump sum (
  27. ^ hitting their own record highs (
  28. ^ are currently stagnating (
  29. ^ trade war (
  30. ^ cut a key interest rate (
  31. ^ Fed is expected to follow suit (
  32. ^ Sign up for The Conversation’s newsletter (

Authors: Jay L. Zagorsky, Senior Lecturer, Boston University

Read more

Metropolitan republishes selected articles from The Conversation USA with permission

Visit The Conversation to see more

Entertainment News

WENDY MOTEN I’ve Got You Covered

WENDY MOTEN may have launched her career as a pop/R&B artist and taken cool detours into jazz along the way, but her heart clearly belongs to NashvilleWendy Moten may have launched her career ...

News Company - avatar News Company

Smooth Jazz Music Legend “Dr. Dave” Releases An Homage To The Tonight Show

Writing and recording smooth jazz albums and performing live over the past 25 years, I’ve learned that people react most powerfully to a song’s rhythms. If you’ve got a great beat that they can mo...

Dr. Dave - avatar Dr. Dave

Singer/Songwriter Darrell Kelley Talks Music and Social Relevance

I feel very blessed that two of my songs, “The Coronavirus” and “Because of You,” are currently in the Top Five on the World Indie Music charts and continue to grow in influence, with over 100,0...

Darrell Kelley - avatar Darrell Kelley

How to Create a Melody on the Piano

Have you ever wondered what it would be like to be able to write a song? Maybe you’ve wondered how anybody goes about writing a song? Once you understand how music works, you can use building b...

News Company - avatar News Company


In the midst of the devastating COVID-19 pandemic, the release of “In the Morning” on Pure Mission Entertainment – the label he partners on with Aaron Emig - follows on the heels of the global s...

Tom Estey - avatar Tom Estey

Expert Advice: Indie Record Producing and Engineering

My career as an independent artist evolved out of my career as an entrepreneur and restaurant owner. I moved to from my hometown of Boston Atlanta in 2013 and opened my soul food restaurant Soul D...

Darrell Kelley - avatar Darrell Kelley

Weight of The World

When the calm of the world is at stake, and every message of hope is crucial to our collective peace of mind and the endurance of the human spirit, it’s not only possible, but essential to present any...

Tom Estey - avatar Tom Estey

DARRELL KELLEY “The Coronavirus”

Even though I have been releasing tracks and albums since 2018, I never considered myself an artist until I started getting responses from people telling me that my songs were resonating with them. ...



During these tumultuous times, people are feeling a loss that is akin to grieving.  Grieving for their former lives and ways and it is unclear when things will return to “normal.”  Grieving for th...

Stephanie Hochman of My Luv Notes - avatar Stephanie Hochman of My Luv Notes

Metropolitan Business News

How to make overseas transfers easier?

Mainstream banks can charge as much as $20 just to process a basic international money transfer. Fortunately, today people are not doomed to handling personal finances only through mainstream gl...

News Company - avatar News Company

The flourishing international market of fragrance and perfume

There is something special and unique about the art of fragrance. This is a big world and there are quite literally a lot of smells around at any given time. In fact, as one of the five human senses i...

News Company - avatar News Company

Impact of good marketing on sales

Sales and marketing are brothers as they go hand and in hand. The job of both of these departments is to generate revenue so that an organization can make money. A company that does not generate rev...

News Company - avatar News Company

7 effective tips for increasing sales in retail

It seems that retailers have drawn a difficult lot in the 21st century: competition from online retail is growing steadily. After all, Internet retailers can sell your products at significantly lowe...

News Company - avatar News Company

10 Reasons to Use Labels

People cannot stop biting their nails, considering the messy condition of their homes. You open your kitchen drawer to grab some utensils, but instead, you take a glance at toys lying inside that dr...

News Company - avatar News Company

15 ways to encourage your office employees

We often get so busy managing our companies and business that we forget about the most important resource that is making our business reach new height every day, our employees. Support of the manage...

News Company - avatar News Company



Are you planning to go on a trip? Possibly, you do not know what things are most necessary on a trip. In this article, we will guide you through some important tips. These tips help you to...

News Company - avatar News Company

New Baggage Regulations to Help Aussie Parents Travel with Infants

Travelling around the globe has never been easy, especially when infants tag along for the trip. One of the main issues that parents often have to deal with is the need to bring extra item...

News Company - avatar News Company

Maya Beach Opens to Tourists

Despite recent reports that Southern Thailand's famous Maya Beach will close for three months this year, in fact no decision to this effect has been made by Thai authorities. Phi Phi Nati...

Maevadi Rosenfeldt - avatar Maevadi Rosenfeldt


Breaking News & Opinion