Consumer confidence has been decreasing for nearly two years now. Factors such as high inflation, rising interest rates, and a K-shaped economic recovery have made it tough for many families, leading to a disturbing drop in consumer optimism.
Currently, this confidence has hit a troubling new low.
The University of Michigan’s Consumer Sentiment Index, which has measured American perceptions of the U.S. economy since 1978, dropped to 44.8 in the last month. This is the lowest figure recorded since the index began.
This is significant as it falls below the previous record low of 50 set in June 2022. Interestingly, this reading is even lower than the worst month during the 2008 financial crisis, when unemployment hit 10% and the S&P 500 index lost over half its value.
It’s also lower than May 1980, which saw interest rates spike to 20%, as the economy struggled due to stagflation stemming from the 1970s.
Historically, a decline in consumer sentiment has often coincided with falling stock markets; typically, when consumers feel grim about the economy, stock prices tend to suffer.
However, this time around, the Vanguard S&P 500 ETF has reached a series of record highs, with the index showing a double-digit growth trend for four straight years.
This occurrence is quite unusual, with stocks hitting all-time highs even as consumer sentiment is the lowest it’s been in nearly five decades.
It’s crucial for investors to grasp the implications of this mismatch.
Historically, there has been a strong correlation between deteriorating consumer sentiment and deteriorating stock market performance.
To provide context for the current numbers, let’s look at some past instances when consumer sentiment fell below 60 since 1978.
May 1980: 51.7. At this moment, the economy was facing recession, interest rates were skyrocketing, and the S&P 500 was still recovering from the bear market of the early 1970s, experiencing a 17% decline from its previous high.
November 2008: 55.3. Following the bankruptcy of Lehman Brothers, the financial crisis deepened, with the S&P 500 index collapsing over 40% and continuing to drop.
August 2011: 55.8. The tensions over raising the U.S. debt ceiling unsettled investors, causing a nearly 19% drop in the S&P 500 index within a few weeks. While sentiment had been declining, both indicators began to recover by early 2012.
June 2022: 50. This was the lowest reading ever at that time, coinciding with a more than 20% drop in the S&P 500 as the Federal Reserve raised interest rates to address inflation that peaked at 9%.
In these instances, consumer sentiment and stock market performance were generally aligned. When conditions were tough, stocks reflected that reality.
Currently, the S&P 500 is at an all-time high, approximately 40% higher than its April 2025 low. And again, these two indicators have never been this disconnected before.
Why sentiment and stock prices tell different stories
One old saying goes, “The economy is not the stock market.” This is also true regarding consumer emotions. While they’re related, one can thrive without the other. With so many factors influencing the economy, any single change could disrupt previously held beliefs.
Looking at the current economic landscape, three main reasons might explain why stock prices and consumer sentiment are diverging.
K-shaped economy
The top 10% of earners contribute about half of U.S. consumer spending. This means a small portion of the population drives much of the economic activity. Despite many struggling with inflation and living costs, the overall economy still has room to grow, largely because a small number of consumers handle a large fraction of economic transactions.
Research on consumer sentiment often captures a wider array of households, providing a more accurate view of the ‘average’ consumer experience.
Artificial intelligence (AI) boom
AI is reshaping the global economy like never before. Companies leveraging AI are witnessing improved efficiency and better financial outcomes, as it allows them to optimize resources.
However, this shift might also put lower-skilled jobs at risk. Even as consumers remain more doubtful about their own situations, businesses view this as a chance for profit expansion.
Strong corporate profits
The S&P 500 is expected to show a 28% year-over-year earnings increase in the first quarter, largely driven by the tech sector—marking the highest uptick since 2021.
So, it’s understandable that stock prices could thrive in such an environment, even if that success comes at the expense of workers and their financial well-being.
However, the real indications of what’s to come may be gleaned by examining the relationship between sentiment and stock performance since the last low. The outcome has often been favorable!
|
date |
Consumer psychology at M University |
U of M consumer sentiment (+1 year) |
S&P 500 12 Month Futures Return |
|---|---|---|---|
|
May 1980 |
51.7 |
72.4 |
19% |
|
November 2008 |
55.3 |
67.4 |
22.3% |
|
August 2011 |
55.8 |
74.3 |
15.4% |
|
June 2022 |
50 |
64.2 |
17.6% |
|
May 2026 |
44.8 |
? |
? |
Data source: University of Michigan, S&P 500.
In all these cases, sentiment measured a significant improvement over the following year, with the S&P 500 generally increasing by over 15%. It seems that historically low consumer sentiment might act as a ‘buy low’ indication for investors.
However, it is essential to understand that there’s not much precedent for what follows when stock prices have climbed more than 30% in the year leading to this point. Relying too heavily on just these four historical references might not be wise either.
Still, there’s a takeaway: historically, when consumer sentiment dips to this extent, the stock markets tend to rally.
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