Transcription
Over the past 6 years, the S&P 500 has nearly tripled in value. That's one of the strongest rallies we've seen in decades. And even today, the market is still sitting just inches below all-time highs.
But when you step back and look at the real economy, a very different picture starts to emerge. Right now, US consumer sentiment has fallen to some of the lowest levels on record. So on one side you have a stock market that looks incredibly optimistic but on the other you have consumers who have rarely felt this pessimistic about the economy and that creates a clear tension because either the sentiment data is missing something or the market is getting ahead of reality.
Now, a lot of investors look at this and think it's nothing unusual. After all, the stock market isn't the economy, right? However, if we zoom out and look at history, we can see that this has never been the case. In fact, consumer sentiment has often acted as a leading indicator for the market. When confidence is strong, like here in the 1990s and again in the 2010s, it usually sets the stage for multi-year bull markets. But when sentiment starts to turn, the opposite happens. We saw it in 2000 when confidence rolled over well before the dot crash. We saw it again in the years leading up to 2008, where the market ultimately lost 60% of its value, and even during the 2020 recession.
And the reason for this is actually quite straightforward. Consumer sentiment is closely tied to how people spend. When people feel uncertain about the economy, they naturally start pulling back, and that has a direct impact on businesses. Less spending means lower revenues, slower earnings growth, and over time, that's what the stock market reflects. So, in many ways, the stock market is still a reflection of the economy.
What's different this time, however, is that the weakness in consumer sentiment over the past 3 years hasn't really shown up in corporate earnings, at least not yet. Consumer sentiment has remained depressed since 2022, sitting around 47. And yet, over the same period, S&P 500 earnings have essentially doubled, which is a big part of what's been driving the current bull market. That's very different from what we saw in past cycles. In 2000, 2008, and even 2020, when consumer sentiment turned lower, it eventually translated into weaker earnings as well.