Why is consumer confidence falling while the stock market keeps rising?

Recent surveys have shown that consumer sentiment has weakened as many Americans continue to express concerns about inflation, housing affordability, interest rates and the overall economy. Yet, at the same time, the stock market has continued to perform remarkably well.

Historically, these two measures have often moved in the same direction. Strong consumer confidence frequently accompanied rising stock prices, while declining confidence often occurred during bear markets or recessions.

Today, however, they appear to be telling two very different stories.

So, what explains the disconnect?

Consumer sentiment measures feelings

Consumer sentiment surveys measure how households feel about the economy today and what they expect over the coming months.

Those opinions are heavily influenced by everyday experiences.

People notice higher grocery bills, rising insurance premiums, expensive housing and elevated interest rates. They see headlines about geopolitical tensions, government spending and political uncertainty.

These experiences naturally influence how consumers answer survey questions.

In other words, consumer sentiment measures emotion and perception.

The stock market measures expectations

The stock market, on the other hand, is not measuring how people feel today.

It is attempting to estimate what corporate earnings, economic growth and interest rates may look like six to 12 months into the future.

Markets are forward looking.

Investors constantly evaluate thousands of pieces of information, including company earnings, inflation data, Federal Reserve policy, productivity gains, technological innovation and global economic conditions.

As expectations change, stock prices adjust long before the underlying economy fully reflects those changes.

This is one reason the market often begins recovering while economic headlines remain overwhelmingly negative.

Large companies are not the economy

Another reason for today's disconnect is that the stock market, particularly the S&P 500, does not perfectly represent the average American household.

Many of the largest companies in the index generate substantial revenue around the world. Their earnings depend not only on the U.S. consumer, but also on international markets, business investment, cloud computing, artificial intelligence, health care innovation and countless other global trends.

Meanwhile, consumers are evaluating their own household budgets.

Those are two very different perspectives.

A family struggling with higher insurance premiums may understandably feel pessimistic, while a multinational technology company continues reporting record earnings.

Both can be true at the same time.

Artificial intelligence has changed the conversation

Another important factor has been the rapid growth of artificial intelligence.

Investors increasingly believe AI has the potential to improve productivity, increase corporate profitability and reshape entire industries over the coming decade.

As a result, many technology companies have experienced significant earnings growth and expanding valuations.

The market is pricing in the potential economic benefits of these innovations, even while many consumers remain focused on today's challenges.

Whether those expectations ultimately prove accurate remains to be seen, but they illustrate the forward-looking nature of financial markets.

Markets have been here before

Although today's divergence appears unusual, history reminds us that markets and sentiment do not always move together.

Following the financial crisis of 2008 and 2009, consumer confidence remained depressed long after the stock market had begun recovering.

Similarly, during the early stages of the COVID-19 pandemic, stock prices rebounded months before many economic indicators improved.

Markets have often recovered well before confidence does.

What should investors do?

Periods like this can be frustrating because they challenge our instincts.

When news headlines are overwhelmingly negative, it feels uncomfortable to remain invested.

However, successful investing has never been about reacting to today's headlines. It has been about maintaining a disciplined investment strategy built around long-term financial goals.

That does not mean investors should ignore risks.

Rather, it means recognizing that markets continuously evaluate those risks and adjust prices accordingly.

Trying to predict short-term market movements based solely on consumer sentiment has historically proven to be a difficult strategy.

Final thoughts

Consumer confidence and the stock market are both valuable indicators, but they answer very different questions.

Consumer sentiment tells us how people feel about the economy today.

The stock market reflects what investors collectively believe the future may hold.

When those two indicators diverge, it can feel confusing. However, it also serves as an important reminder that emotions and investment returns do not always move together.

History has repeatedly shown that some of the strongest market advances have occurred during periods when investors were the most uncertain. While no one knows exactly what the next year will bring, maintaining a diversified portfolio and focusing on long-term goals has generally proven to be a more successful strategy than allowing short-term sentiment to drive long-term investment decisions.

Reid Schwartz is a columnist for The Item and co-founder of Creech Schwartz Wealth Management in Sumter, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.

*Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners LLC.

This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional. Past performance is not indicative of future results.

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