US stocks are still trading. "Bad news is good news"? Things are changing.

The earnings season for the second quarter of the US stock market has basically ended, and investors have been closely following the latest economic data. In most cases, they react positively to "bad economic news" or any data that may indicate an economic slowdown.

When will this "bad news is good news" trading pattern change?

Employment is slowing down

Chris Fasciano, portfolio manager at Commonwealth Financial Network, said that this trend has been going on for nearly 9 months, as weak economic data and lower inflation may mean that the Federal Reserve can stop raising interest rates.

As of last Friday, federal funds futures traders estimated that the probability of the Federal Reserve maintaining the policy interest rate unchanged at the September meeting exceeded 90%, and the probability of a 25 basis point rate hike in November was about 35%.

Data released on Friday showed a cooling job market, but some speculate that the "mirage" about the end of summer employment may be one of the factors.

Richard Flax, Chief Investment Officer at Moneyfarm, said that these data support the argument that the job market is gradually slowing down, but there is no sign that the economy is significantly weakening.

When will it change?

Jamie Cox, Managing Partner at Harris Financial Group, said, "The economic data is not bad, it's just soft. If you see very bad economic data, you won't be particularly optimistic."

However, Cox pointed out that if investors see a significant decline in the real estate market and job market, the situation may change.

Flax pointed out that in order to break the cycle of "bad news is good news," economic data must be much worse than it is now, indicating greater damage caused by high interest rates.

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David Merrell, founder of TBH Advisors, said that investors should also be wary of the possibility of inflation accelerating again.

"Inflation is generally on a good downward trend. But if it starts to rise again, that could mean real bad news," said Merrell.

If investors start to view bad economic news as bad news, it could put pressure on a rebound in the US stock market in 2023.