Are we in a Goldilocks economy right now? What does this term even mean and how will it impact the market?

In the past few months, the term Goldilocks economy has been thrown about with suggestions we have (or perhaps just the US has) one right now. We thought it was about time to address that question, and perhaps help out investors wondering what that term even means.

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What does the term Goldilocks economy even mean?

The term comes from the Goldilocks fairy tale, where Goldilocks finds things that are “just right” and not too extreme in either direction (i.e. not too hot or too cold).

And so a Goldilocks economy is one that has traits including moderate GDP growth (enough to sustain corporate earnings), low to moderate inflation (within central banks’ target ranges), Stable interest rates (or a dovish central bank) and a labour market that is strong but not overheating. And so there won’t be runaway inflation (or stagflation) or a recession.

What does this mean for stocks?

Well, a goldilocks economy creates an ideal backdrop for stocks to perform well, particularly growth stocks and other risk assets. This is because the economic conditions support profitability without the threat of aggressive monetary tightening or an economic downturn.

Clearly in such a scenario, investors feel confident: the economy is growing, but the central bank doesn’t have to slam the brakes. Stocks tend to perform well because earnings growth gets rewarded, but downside risks are less extreme.

The main risk with believing in a Goldilocks environment is that “just right” conditions are fragile. A small shock — inflation surprise, tightening, global shock — can tip things into recession or overheating.

Are we in one now? The yes case

It is difficult to give a succinct yes or no, but the economy is likely closer to it than it has been at any other point this decade. The pandemic was not an ideal scenario, but neither was runaway inflation following the pandemic. The US economy has plenty of supporting signs including GDP growth between 1 and 2%, inflation is arguably under control, the Fed has already cut rates multiple times from the peak and there might be more to come. And the equity markets have been performing well. It is a similar story in Australia too.

The no case

But there are some warning signs including that inflation is reaccelerating, something particularly true in Australia when inflation data came out higher than expected. Some analysts now don’t expect a further RBA rate cut until early next year, and perhaps not any at all. We mentioned the word ‘stagflation’ above which alludes to weak growth but upward inflation pressure. RBC specifically warned this was emerging in the US economy.

Moreover, if something goes wrong, the drop could be sharper than further upside. We’ve seen the impact to markets caused by tariff policies, global supply chain stress, geopolitical tensions, and the behaviour of foreign central banks can all upset the balance. Tariffs in particular could begin to bite in 2026 when they begin to be reflected in corporate earnings and in GDP figures.

Speaking of ‘corporate earnings’, they have been positive. But some markets are heavily concentrated (a few large tech names carrying much of the gains), making them vulnerable if sentiment shifts. While there is a lot of possibilities in AI to impact earnings, there is concern that markets may be pricing in too high of a short-term effect. Some even suggest that it is another dot com bubble.

Conclusion

All things considered, you will notice while we mentioned there was a lot more we mentioned in the ‘no case’, these were future hypotheticals rather than what the economy is like now.By the same token, the state of the economy now will not last forever. So to anser the question of the article, you could argue we are in a Goldilocks economy and we are certainly close to it. But investors need to be cautious that seemingly perfect conditions will not last forever.