8th August 2026
The economy looks worrying, consumers remain cautious and inflation is still causing concern yet stock markets continue to climb. Is this confidence justified, or are investors looking at a very different world from everyone else?
There is something increasingly strange about the economic picture.
Ask many households how the economy is doing and the answer is likely to be gloomy.
Prices remain high.
Mortgage and borrowing costs are still a concern.
Food and energy bills have risen substantially over recent years.
Employment figures have shown signs of weakness.
Inflation may have fallen, but prices have not.
Yet look at the stock market and you could be forgiven for thinking Britain and much of the developed world are enjoying remarkably good economic times.
So which picture is correct?
The uncomfortable answer is that both can be correct at the same time.
The stock market is not the economy
One of the biggest misunderstandings in economic reporting is treating the stock market as though it were a scoreboard for the entire economy.
It isn't.
The stock market is primarily a market for ownership of companies.
Investors are buying shares because they believe those companies will generate profits and cash in the future.
That means today's poor economic statistics do not necessarily prevent share prices from rising.
Investors are constantly looking ahead.
If they believe inflation will eventually fall, interest rates will decline and corporate profits will remain strong, they may be prepared to buy shares today even when the economic statistics look uncomfortable.
In effect, they are saying:
"Things may be difficult now, but we think they will be better later."
Consumers are living in the present
Households have a completely different perspective.
They aren't buying an economic forecast.
They are buying groceries.
They are paying the mortgage or rent.
They are filling the car.
They are renewing insurance.
They are paying energy bills.
They are dealing with today's prices.
That creates an enormous difference between the experience of an investor and that of an ordinary household.
An investor can look at a company's expected profits three years from now.
A household may simply be asking whether it can afford this month's bills.
Falling inflation doesn't mean falling prices
This is where the confusion over inflation becomes particularly important.
If inflation falls from 5% to 3%, prices are still rising.
They are simply rising more slowly.
And after several years of substantial inflation, that leaves households with a much higher overall price level.
This is why somebody can hear that inflation is "under control" and still quite reasonably respond:
"It doesn't feel like it."
They are not necessarily misunderstanding the economy.
They are experiencing the accumulated effect of previous price increases.
So why are investors still buying?
There are several possible explanations.
They are looking forward
Financial markets tend to anticipate economic changes.
Investors may believe today's weak employment or consumer figures are temporary.
They may expect interest rates to fall.
They may expect corporate profits to remain resilient.
They may believe productivity improvements, particularly from artificial intelligence and automation, will eventually produce stronger economic growth.
If enough investors believe that, share prices can rise before the improvement becomes visible in the official statistics.
The biggest companies aren't necessarily dependent on Britain
There is another important reason why the FTSE 100 can perform well even when the British economy looks weak.
Many of Britain's largest listed companies generate substantial amounts of their revenue overseas.
Their performance therefore depends on the global economy, not simply what happens in Britain.
A weak pound can also increase the sterling value of overseas earnings.
So a British consumer struggling with the cost of living and a multinational company reporting strong profits are not contradictory.
They can exist side by side.
Then there is debt
This is perhaps the less visible part of the story.
A significant amount of corporate activity — particularly takeovers — is financed with borrowed money.
The principle is relatively straightforward.
A buyer acquires a company using a combination of its own money and debt.
The acquired business then generates the cash flow needed to service that borrowing.
This is commonly associated with leveraged buyouts and private-equity transactions.
And when interest rates are low, leverage can be extremely attractive.
Imagine an acquisition leaves a company with £500 million of borrowing.
At a 3% interest rate, the annual interest bill would be around £15 million.
At 7%, it would be £35 million.
The company has not changed.
Its customers have not necessarily changed.
Its factories and employees have not changed.
But £20 million more of its annual cash flow has suddenly disappeared into interest payments.
That can make a huge difference.
Cheap money can make expensive companies look affordable
This is one reason interest rates matter so much to the takeover market.
When borrowing is cheap, a buyer can potentially afford to pay more for a business because the cost of financing the acquisition is relatively low.
But when borrowing becomes expensive, the arithmetic changes.
A business producing £50 million of annual cash flow may look extremely attractive if the cost of servicing its acquisition debt is manageable.
If interest rates rise sharply, a much larger proportion of that £50 million can be swallowed by interest.
Suddenly the same company is worth less to a highly leveraged buyer.
This doesn't mean every takeover is dangerous.
Many acquisitions are financed conservatively, and some companies have strong cash flows and relatively little debt.
But it does mean that the financial conditions under which a deal was made matter enormously.
What happens when the debt has to be refinanced?
This is where some of the risks can remain hidden for several years.
A company may have taken on debt when interest rates were low.
If that debt is fixed for several years, the higher interest rates may initially make little difference.
But eventually the loan has to be refinanced.
If borrowing costs are much higher at that point, the company can suddenly face a much larger interest bill.
That can lead to:
reduced investment;
lower dividends;
asset sales;
job reductions;
pressure to raise new equity;
or, in extreme cases, financial distress.
This is why interest rates can affect the economy with a considerable time lag.
Leverage works both ways
There is nothing inherently wrong with borrowing.
Businesses borrow to build factories, buy equipment, expand into new markets and acquire other companies.
Debt can be productive.
The danger comes when the borrowing becomes excessive relative to the cash the business can generate.
Leverage magnifies returns when everything goes well.
But it can magnify losses when things go badly.
That is why the combination of high company valuations and significant debt deserves attention.
It doesn't mean a crash is coming.
It means some companies have less room for error than they might appear to have.
Are investors simply being reckless?
Probably not.
That would be too easy an explanation.
Investors have access to enormous amounts of information and sophisticated financial models.
They know interest rates are important.
They know inflation is a risk.
They know employment is weakening in some areas.
They know valuations can become excessive.
Yet they are still buying because they are making a judgement about the future.
The question is whether those judgements are correct.
And that is where markets become interesting.
Markets don't need everything to be good
Investors don't need the economy to be booming.
They simply need to believe that the future will be better than the current price implies.
Suppose everyone becomes convinced that the economy will be terrible.
Share prices fall accordingly.
Then the economy turns out to be merely mediocre.
Suddenly shares can rise because reality wasn't as bad as investors had feared.
This is why markets can rise during apparently bad economic periods.
The market is not necessarily saying:
"Everything is wonderful."
It may be saying:
"Things aren't as bad as the price already reflects."
Could this be the calm before a fall?
Possibly — but this is where we should be careful.
It is tempting whenever markets reach record highs to predict that a crash must be around the corner.
History shows that markets can remain expensive for considerably longer than expected.
A fall becomes more likely when something changes the underlying assumptions supporting valuations.
For example:
Inflation rises unexpectedly → interest rates stay higher → borrowing becomes more expensive → company profits come under pressure → share valuations fall.
Or:
Economic growth weakens sharply → consumers spend less → corporate profits fall → investors reduce their expectations → share prices decline.
Or:
Investors decide that the profits expected from the AI revolution will not arrive quickly enough → technology valuations fall → wider markets become unsettled.
Heavy corporate debt could amplify any of these shocks.
The real economic disconnect
This brings us back to the strange situation facing Britain.
The consumer sees:
High prices + expensive borrowing + economic uncertainty.
The economist sees:
Falling inflation + weak growth + mixed employment data.
The investor sees:
Future profits + interest-rate expectations + global growth + opportunities.
All three can be looking at the same economy and reaching completely different conclusions.
That doesn't necessarily mean somebody is wrong.
They are simply asking different questions.
And perhaps the public is more realistic than we think
There is another lesson from all this.
Consumers may complain about the economy because they are experiencing the consequences of higher prices every day.
But that doesn't necessarily mean they have stopped spending.
People can be pessimistic about the economy while remaining optimistic about their own finances.
They can cut spending in one area and continue spending in another.
They can complain about inflation while still going on holiday.
They can believe the economy is struggling while buying shares or paying into a pension.
Human economic behaviour is considerably more complicated than a single confidence survey suggests.
The warning we should perhaps be watching
The biggest danger isn't necessarily that the stock market is high.
It is that investors could become too confident about the future while businesses become too dependent on cheap or easily available debt.
If profits disappoint while borrowing costs remain high, the market could discover that some of the optimism was built on assumptions that no longer hold.
That is when leverage becomes important.
A highly indebted company doesn't have to fail for its shareholders to suffer.
It simply has to become less profitable than expected.
So is the market wrong and consumers right?
Not necessarily.
The stock market could be correctly anticipating an improvement in economic conditions.
Consumers could also be correctly reporting that life remains expensive.
The two statements are not mutually exclusive.
Perhaps the most interesting possibility is that the economy is going through a transition rather than a simple boom or bust.
The inflation shock has left prices permanently higher.
Interest rates have changed the economics of borrowing.
Businesses are adapting.
Consumers are adapting.
Investors are looking beyond today's difficulties towards the next phase of growth.
The big question is whether that optimism is justified.
For now, the stock market is voting "yes".
But markets have a habit of changing their minds very quickly when the numbers eventually prove them wrong.
And that may be the most important thing to remember when looking at today's record share prices:
A rising market is not necessarily telling us that the economy is healthy. It is telling us what investors currently believe the future will look like.