Michael Steinhardt, in his 2001 autobiography “No Bull: My Life In and Out of Markets,” said that understanding market expectation is at least as important as, and often different from, fundamental knowledge. These words cut to the heart of a paradox that has endured for ages on Wall Street. That bad news can cause a stock to rally.
To the uninitiated, this is nonsensical. Normally, weak earnings or disappearing demand should scare the market. And the natural response should be that investors cut losses and run for the door.
Yet, stocks that have gained by massive margins after such news litter the landscape of the equities market. And no, this is not a consequence of an irrational market but a mechanism by which investors price the future. This article gets into the depth of this phenomenon.
When Bad News Beats Expectations
In late 2025, the ADP National Employment Report showed that US private-sector jobs declined by 32,000. This was a huge surprise to the market; economists polled by Reuters had forecast that private employment would rise by at least 10,000 in November.
This kind of miss, where actual jobs data slide into the negative territory against a positive forecast, often rattles markets because it suggests labor market weakness. And one expects that the market registers dissatisfaction with a sell-off.
Wall Street was quick to shrug off the weakness and pumped up buying pressure. By the end of that day, December 3, all major indexes registered solid gains. Sam Stovall of CFRA Research later told investors that the “market is happy with what the weaker than expected jobs report will mean for the Fed’s likelihood of cutting rates when they meet on December 9th and 10th.”
Capital Economics’ Stephen Brown agreed with the sentiments, stating that “the modest fall in the ADP payrolls measure in November... should be enough to persuade the (Fed) to vote for another cut next week.”
Plainly stated, US stocks finished the day in the green because investors digested the implications for future monetary policy. That is, the weaker employment figures raised expectations that the US Federal Reserve, or Fed, would cut rates. And if the cut actually happened, the increased liquidity would support equities.
Experts call this phenomenon the relief rally. They argue that markets punish surprises, not nominal performance. That is, when consensus has priced in catastrophe, merely “bad” outcomes register as bullish relief.
Markets Price Expectations, Not Headlines
Academics like Leighton Vaughan Williams and colleagues advise investors to think of the equities market as a prediction engine. In their study, “Prediction Markets: Theory, Evidence and Applications,” the authors argued that markets aggregate dispersed information and effectively forecast future events. They also noted that participants pay closer attention to consensus expectations than to what the headlines are saying at the moment.
The thing is that most news, be it bad or good, is backward-looking. For example, ADP’s weak employment data described what happened in November and the market was already looking at what might happen when the Federal Open Market Committee, or FOMC, sits down for a rate change decision later that month.
And as they looked at the employment data, investors focused more on what it implies about FOMC’s future decisions than the data itself. In less technical terms, bad news that reduces uncertainty about future policy direction can reduce perceived risk and prompt investors to buy more.
Bottom Line
It is possible for stocks to rise on bad news. And that doesn’t in any way say that the market is irrational. What it means is that investors price expectations, or in simpler terms, markets ride on expectations.
