Wall Street: What Really Drives the U.S. Stock Market?

When investors discuss the U.S. stock market, attention usually centers on the S&P 500, Nasdaq and Dow Jones.

But an index is not the economy, and a rising index does not necessarily mean every company is performing well.

Equity prices fundamentally reflect expectations for future corporate earnings, discounted by interest rates and the return investors demand for taking risk.

That makes interest rates extremely important.

When risk-free yields rise, investors may become less willing to pay high valuations for profits expected many years into the future—particularly in growth and technology companies.

Corporate earnings, margins, productivity, capital expenditure and liquidity also influence valuations.

Another common mistake is to treat the U.S. market as a single asset. Different sectors can behave very differently under the same economic conditions.

A professional reading of Wall Street therefore requires monitoring earnings, valuations, rates, liquidity and market breadth.

Ultimately, markets do not simply price today's economy. They continuously attempt to price economic and corporate conditions six to twelve months into the future.