How Liquidity Sustains Equity Markets Without Recovery

Liquidity can lift equities without economic recovery. A breakdown of financial flows and their impact on markets.

For several quarters, equity markets have advanced in fits and starts while macroeconomic indicators have remained mixed. Sluggish growth, hesitant productivity, margins under pressure in certain sectors. Indices, however, are holding. The gap is explained less by improving fundamentals than by the circulation of financial liquidity, often invisible in traditional economic statistics. This point is illuminated in how monetary regimes reprice equities.

Financial Flows Disconnected From the Cycle

Liquidity here refers to the financial system’s ability to supply capital available for asset purchases. It comes primarily from monetary policy, institutional savings and market mechanisms such as passive investing. Unlike growth or employment, these flows do not require a dynamic economy to deploy.

Between 2023 and late 2025, despite a marked growth slowdown across several developed economies, assets invested in global equity ETFs continued to rise, with annual net flows of $532 billion in 2023, $1.11 trillion in 2024 and $1.14 trillion in 2025 according to ETFGI. This mechanical demand creates price support, independent of the immediate trajectory of activity.

The phenomenon fits within a broader logic of dissociation between financial markets and the real economy, already structured in the explanatory framework presented in the cluster’s pillar article.

Monetary Policy: The Most Powerful Indirect Channel

Part of the consensus still associates market support with economic recovery. This reading assumes central banks loosen policy only in response to cyclical improvement. Recent episodes show the opposite: liquidity can rise within a deteriorated economic context.

When central banks stabilize or cut policy rates, or signal the end of a restrictive cycle, marginal liquidity returns to financial markets before diffusing into the economy. In 2024–2025, while US growth slowed from 2.9% to 2.3% according to the BEA, expectations of monetary easing were enough to sustain accommodative financial conditions, without any visible acceleration in productive investment. A related read: Why GDP Growth Is a Poor Indicator for Equity Markets.

The channel is indirect but effective: lower expected volatility, compressed risk premia, reallocation toward risk assets. Liquidity acts through valuation, not through production.

Buybacks and Passive Investing: A Structural Demand

Alongside central banks, companies themselves constitute a major source of liquidity for equity markets. Share buyback programs reduce available float and mechanically support prices, even absent revenue growth. The Federal Reserve’s Financial Accounts (Z.1, table F.103) measure the net effect: US nonfinancial corporations retired more shares than they issued every year from 1994 to 2025, 32 consecutive years and $8.0 trillion in total, peaking at $628 billion in 2018 and still $348 billion in 2025. In depth: the myths surrounding the stock market.

This demand is amplified by passive flows, whose automatic allocation mechanics reinforce buying pressure on already dominant capitalizations, independent of any fundamental analysis.

In 2024, S&P 500 buybacks reached a record $942.5 billion according to S&P Dow Jones Indices. This internal demand acts as a market shock absorber, broadly insensitive to the short-term economic cycle.

Passive investing reinforces this dynamic. Flows toward market-cap-weighted indices automatically direct capital to the largest names, amplifying concentration and index resilience. To understand this structural mechanism, it is useful to revisit how equity markets function and the weighting logic underpinning them.

A Time Lag Often Misread

This liquidity support creates a lagging effect. Markets rise before the economy improves, or without it actually doing so. This point is often interpreted as the rational anticipation of a future recovery.

Yet in many recent episodes, the rise in indices preceded only a basic economic stabilization, without any genuine subsequent acceleration. Liquidity acts immediately, where macroeconomic adjustments take several quarters. This lag blurs the cyclical reading.

What becomes relevant now relates to the regime change observed since late 2025: higher real rates, but financial liquidity still abundant through passive and institutional flows. This coexistence makes classic economic signals less operative for reading markets.

What Could Challenge This Support

Liquidity is neither unlimited nor eternal. Several factors can reduce its impact. A more durable monetary tightening than expected, a rise in volatility or a reversal in passive flows would rapidly alter the current equilibrium. The first has already started: on 17 September 2026 the FOMC raised its target range from 3.50-3.75% to 3.75-4.00%, its first hike since July 2023 (Federal Reserve).

Some market participants currently favor the hypothesis of a gradual normalization without shock. This hypothesis rests on the stability of flows and monetary policy. A break in either parameter would suffice to weaken the current support, even without further macroeconomic deterioration.

Observable Economic Impacts

For companies, this dynamic favors large listed groups able to access financial markets directly, independent of final demand. For households, it widens the gap between daily economic perception and financial asset performance. For markets, it deepens concentration and sensitivity to flows.

Liquidity thus becomes a central reading variable, distinct from growth, employment or productivity. A financial variable, not an economic one.

Last updated — 6 October 2026