The Stock Market Is No Longer Connected to the Economy
It's Not About 'Good Companies' Anymore: How to Understand the New Market Logic.
The idea that the stock market is driven by fundamentals, economic data, or any coherent logic is a comforting bedtime story for people who still use dial-up.
You are right to reject it.
The daily attempts to explain its movements—"good news is bad news," "bad news is priced in"—are exercises in applying an obsolete framework to a system that has fundamentally changed.
But the market is not irrational. It is ruthlessly logical, but it is running on a new operating system.
It is a closed-loop, self-referential machine whose sole purpose is to absorb capital and turn it into higher asset prices.
To understand it, you don’t need an economics degree. You need a schematic.
So, here are the three components of the Perpetual Motion Machine that dictate modern markets.
Component #1: The Fuel
The machine runs on a single, abundant fuel source: capital.
But not productive capital. Stagnant capital.
For the first time in history, there is simply too much money in the world with nowhere useful to go.
Consider the numbers:
→ Global Assets Under Management now exceed $130 trillion.
→ Corporate balance sheets are waterlogged with trillions in idle cash.
→ A tiny sliver of the global population controls an unprecedented share of this wealth.
This vast ocean of capital must find a home, or it evaporates under the heat of inflation.
It cannot be deployed productively in the real economy at a sufficient scale—there aren’t enough factories to build, bridges to fund, or ventures to launch that can absorb this much cash and deliver the required returns.
So, by default, it sluices into the deepest, most liquid basin available: the public stock market.
This is the machine’s prime directive: it is an engine for absorbing excess capital.
Everything else is secondary.
The price of a stock is no longer a signal of its underlying company's health; it is a measure of how much of this capital torrent is being aimed at its ticker symbol.
Component #2: The Engine
How does the machine channel this fuel?
Through a ruthlessly efficient, unthinking engine: passive indexation.
The rise of passive investing through ETFs and index funds is the most radical rewiring of market mechanics in a century.
Over half of all US stock fund assets are now in passive funds, dominated by a handful of giants like BlackRock and Vanguard.
Every two weeks, millions of 401(k) plans automatically buy stocks, regardless of price, valuation, or economic conditions.
Every day, trillions of dollars managed by ETFs are forced to buy and sell based on inflows, outflows, and rebalancing events, not on analysis.
This creates a powerful, non-stop momentum factor that has nothing to do with value.
When money flows in, the autopilot is legally mandated to buy the biggest companies in the index (Apple, Microsoft, Nvidia), making them bigger, which in turn attracts more capital into the index.
It is a perfect feedback loop.
This engine has systematically destroyed price discovery.
The market is no longer a weighing machine, as Ben Graham taught.
It's a flow machine. And the autopilot ensures the flow is almost always directed upward.
Component #3: The Governor
Every machine needs a failsafe to prevent it from destroying itself.
In markets, this failsafe is provided by the world’s central banks.
Before 2008, investors operated with the understanding that a catastrophic market crash was always possible. That risk is now gone. Since the financial crisis, a clear precedent has been established: if the market faces a true systemic collapse, central banks will intervene with overwhelming force, injecting trillions of dollars to prevent failure.
This is the “Central Bank Put”—an unspoken insurance policy against a total wipeout. The worst-case scenario, what investors call “left tail risk,” has been effectively removed by the people who can print money.
This fundamentally changes investor behavior.
Why fear the fall when there is a guaranteed safety net below?
The logical response is to take on more risk.
It encourages a "buy the dip" mentality, because investors have been taught that while individual companies might fail, the system itself will be bailed out.
If you need one historical moment that proves the existence of this machine, look at the COVID-19 crash and its aftermath.
In March 2020, the real economy was switched off.
Global commerce ground to a halt. Unemployment exploded.
By any rational, historical measure, the stock market should have entered a multi-year depression. And for a few weeks, it did.
Then, the machine’s components kicked in with godlike force.
The Governor: The Federal Reserve and global central banks injected trillions of dollars of liquidity in a matter of weeks. The insurance policy was invoked.
The Fuel: Trillions in stimulus payments were dumped into an economy with shuttered businesses. With nowhere to spend it, a huge portion of that capital cannonballed directly into the stock market via brokerage apps.
The Engine: The autopilot, fueled by these new inflows, began its relentless, price-agnostic buying.
The result was the most violent market reversal in history.
The market didn't predict a V-shaped recovery. The market was the V-shaped recovery, because the machine's only function is to turn liquidity into higher prices.
That was the moment the myth of a rational market died for anyone paying attention.
You cannot win a game if you are using the wrong rules.
The old rulebook—based on earnings, valuation, and economic forecasting—is useless now. The new game has only three rules.
Stop Forecasting the Economy. The old model assumed a strong economy meant a strong market. That link is now broken. Good GDP or unemployment figures are irrelevant if central banks are tightening the supply of money. Conversely, a weak economy doesn't matter if the government and central banks are flooding the system with cash. The machine doesn't run on economic growth; it runs on a supply of capital. Your analysis must shift from economic reports to tracking money flows.
Trace the Capital, Not the Narrative. The old job was to analyze a company's story: its leadership, products, and potential for growth. The new job is to be a plumber who understands the system's pipes. Instead of asking "Is this a good company?", the questions are now mechanical: "Where are 401(k) contributions being automatically funneled every two weeks?" "Which stocks are ETFs required to buy when capital flows into the index?" "Which assets benefit most when the central bank safety net is announced?" Trace the path the money is forced to take, because that path determines price more than any company narrative.
Respect the Machine. The most dangerous thing you can be in this market is rational in the old-world sense. The system is designed to punish you for it. Even if traditional analysis tells you the market should fall, it probably won't, because central banks will prop it up. If you act on that traditional logic and sell, you will likely miss out on gains as the "machine" keeps pushing prices higher.
The market's apparent chaos is not a product of irrationality.
Chaos is an illusion; what we see is the output of a machine that perfectly follows its programming.
It does not care about the analysis of earnings reports or economic forecasts.
It only cares about its inputs: capital inflows and central bank directives.
Once you accept that you are not in a marketplace of ideas, but standing in the gears of this machine, the path forward becomes much clearer.
Thank you for tuning in today and supporting this publication!
Mike Thornton, Ph.D.
This is educational content, not personalized financial advice. Consult a licensed fiduciary advisor before making any investment decisions.
Hard to argue with the clarity here. This framework reshaped how I interpret post-2008 market behavior—where price now seems more like a function of capital inertia, index autopilot, and central bank policy than true economic value. Brilliant article. Grateful for the perspective.