For our quarterly update, we'll delve into a paradox that has many scratching their heads: Why are stock markets achieving new all-time highs when the everyday American consumer feels anything but optimistic? This piece aims to clarify this disconnect and offer a clear perspective for our clients’ continued investment journey.
Let's begin by examining the pulse of the American consumer and small business owner.
The somber grip of sentiment: what the indicators are saying
Recent data from widely followed sentiment indicators paint a picture of unease, far removed from the optimism often associated with soaring equity markets.
The University of Michigan Consumer Sentiment Index delivered a stark message, dropping to a record low of 48.2 in early May 2026, a notable decrease from April's 49.8 and exceeding the record low observed in June 2022i. This erosion of confidence is largely attributed to persistent concerns over elevated prices, particularly for gasoline, which continue to squeeze personal finances and dampen enthusiasm for major purchases. Even year-ahead inflation expectations, at 4.5% in May 2026, remain stubbornly higher than pre-pandemic averages, and inflation-adjusted wages have continued on a downward trendii.
The NFIB (National Federation of Independent Business) Small Business Optimism Index, despite a marginal uptick to 95.9 in April 2026 from March's 95.8, remains below its 52-year average of 98.0 for the second consecutive monthiii. Small business owners consistently highlight inflationary pressures and availability of quality labor as primary challenges.
Furthermore, expectations for improved business conditions have seen a fourth consecutive monthly decline, reaching their lowest point since October 2024.
In essence, while you might hear news of market milestones, the prevailing sentiment among those navigating daily expenses and running small businesses is one of pervasive caution, if not outright concern.
A tale of two realities: market ascension amidst consumer angst
Against this backdrop of consumer and business pessimism, the performance of major stock markets presents a striking contrast.
Despite making new highs recently, the first quarter of 2026 proved to be a challenging one for the broader U.S. market. The S&P 500 recorded a total return of -4.3% in Q1 2026, marking its worst quarterly performance since the first quarter of 2025. Just before rallying into quarter end, the index was down over 7%iv, heavily influenced by surging oil prices following the conflict in Iran and a significant dip in the high-flying tech sector.
However, it's crucial to consider the broader context. Heading into the quarter, a late-year rally in 2025 had pushed global stocks to near all-time highs. Even with the Q1 dip, the S&P 500 remains up 26.0% year over year as of mid-May 2026v.
Similarly, foreign equity markets faced headwinds in Q1 2026, experiencing modest declines across most regions. Asian and emerging markets were more mixed, with some markets, such as India, seeing significant drops. Yet, much like the U.S., the underlying strength from earlier periods and a rotation towards sectors like energy and semiconductors indicate a more complex, rather than uniformly negative, story.
This creates a peculiar juxtaposition: a pessimistic consumer navigating economic uncertainty, while the very engines of the global economy—corporate entities and the markets that value them—continue to find pathways to growth and, in many cases, generate remarkable returns over the longer term.
Explaining the divergence: teasing out the parallel narratives
The reasons behind this apparent disconnect are multi-faceted, stemming from distinct forces impacting consumers versus corporations and the broader market.
In this challenging environment, several factors have undeniably stressed the consumer psyche.
First is persistently high inflation. The annual inflation rate in the U.S. accelerated to 3.8% in April 2026, jumping from 3.3% in March and marking the highest rate since May 2023vi. Costs of services like rent and home ownership remain elevated and goods prices have risen after experiencing declining prices in 2024vii. Consumers are clearly feeling the strain of these rising costs, as indicated by sentiment surveys.
Then there is the obvious spike in oil prices. Geopolitical tensions, particularly military actions in the Middle East in February 2026, effectively disrupted traffic through the Strait of Hormuz, causing a sharp increase in crude oil prices. Brent crude, which started the year at around $60 per barrel, reached a striking $110 per barrel in Aprilviii. This quickly translated to higher costs at the pump, with the U.S. average retail gasoline price reaching over $4.50 per gallon and diesel nearly $5.70 per gallon, the highest prices in almost four yearsix. These price shocks directly contribute to inflationary fears and dampen consumer confidence.
Finally, there’s stagnant job growth and the underlying anxieties that accompany this dynamic. While some reports point to recent job gains, the overall picture of the labor market presents nuances that contribute to consumer unease. Although April 2026 saw 115,000 new jobs and a 57,000 monthly average for 2026 (a marked improvement from 2025's 27,000 monthly average), the data have been volatile, with February experiencing a 156,000-job decline, leading to a mere 0.1% year-over-year employment growthx. The labor force participation rate also remains at its lowest level since 2021. Small businesses continue to grapple with labor quality issues, further hinting at underlying vulnerabilities in the job market that weigh on the consumer perception of economic security.
Conversely, a transformative force is simultaneously propelling economic growth, corporate profits, and stock market returns.
Continuing to dominate the corporate landscape is the AI infrastructure buildout and rapid technological advances. We are witnessing an unprecedented capital expenditure cycle driven by Artificial Intelligence. AI-related capital expenditures contributed a significant 1.1% to Gross Domestic Product (GDP) growth in the first half of 2025, outpacing consumer contributions as an engine of expansionxi. Leading “hyperscalers” like Meta, Alphabet, Microsoft, Amazon, and Oracle are projected to pour over $1 trillion into AI capital expenditures in 2026 and 2027, primarily for data centers, Graphics Processing Units (GPUs), and advanced software development. Global AI infrastructure investment is expected to exceed $600 billion in 2026 alonexii.
The AI spend is supporting solid economic activity and high corporate profit growth. This massive investment in AI is acting as a crucial driver of economic resilience. Goldman Sachs Research, for instance, forecasts a robust 2.8% real GDP expansion for the U.S. in 2026, partly fueled by these tech investments and supportive fiscal policiesxiii. The productivity gains from AI are starting to materialize, with non-farm business sector labor productivity rising 0.8% in Q1 2026 and 2.9% year-over-year. Corporations are already seeing tangible benefits: in Q1 2026, a remarkable 84% of S&P 500 companies reported earnings per share above estimates (the highest percentage since Q2 2021), with a blended earnings growth rate of almost 28%xiv. Many companies have reported substantial revenue growth attributable to AI, demonstrating its direct impact on their bottom lines. This isn't just hype; it's tangible revenue generation and efficiency gains across various industries.
What this all means for client accounts: preparing for multiple scenarios
These seemingly contradictory signals from Main Street and Wall Street underscore a growing disconnect. While the average consumer grapples with the immediate impact of inflation and a somewhat uneven job market, the corporate world—particularly in the tech sector— is deeply entrenched in a transformative AI cycle. This cycle is characterized by immense capital investment, rapidly advancing capabilities, and a clear boost to corporate profits—and in turn, stock market valuations.
Interestingly, there are numerous examples of history taking lemons and making lemonade. In fact, extremely weak consumer confidence has not historically prevented strong stock market returns. Prior to its recent dip, the University of Michigan Consumer Sentiment Index fell to an all-time low in June 2022. While sentiment improved by September 2023, it remained below its long term average. Despite this, U.S. stocks have more than doubled since that low—reinforcing a pattern seen in prior periods of depressed sentiment. Looking back at earlier low points in sentiment, the S&P 500 produced strong five-year returns, with a median cumulative gain of about 120% and a median annualized return of roughly 17%xv. The key takeaway is that markets often recover well before consumer confidence does, so investor pessimism and market performance are not always aligned.
As always, maintaining a well-diversified portfolio across a broad range of assets remains paramount. For example, many of our broadly diversified client portfolios have held positions in asset classes that can benefit from elevated inflation. U.S. Treasury Inflation-Protected Securities (TIPS) and Real Estate Investment Trusts (REITs) both contributed to helping stabilize periods of stock market volatility during the first quarter. Most importantly, the allocation to commodities experienced strongly positive performance that meaningfully tempered negative stock performance.
Within asset classes, our managers used recent price swings to reposition client accounts toward investments that offered better valuations, and away from positions that saw outsized returns and hence, elevated valuations. We also took advantage of the dip in stock prices to execute tax-smart investment managementxvi actions in accounts where taxes matter.
Overall, we continue to monitor these complex dynamics to position your investments strategically and prepare for a wide variety of potential outcomes. We believe that clients who maintain a formalized financial plan and remain focused on long-term goals may be better positioned to achieve favorable outcomes.