What are Q1 earnings telling us about the current market?
Jeff Bradacs, CFA – Co-Head Equity Strategies, Head of Portfolio Management & Trading
How is the S&P 500 climbing while consumers are struggling financially?
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
In April, the S&P 500 gained over 10% - its best month since November 2020 - and closed at fresh all-time highs above 7,200. In the same month, the University of Michigan Consumer Sentiment Index fell to 49.8, the lowest reading on record going back to 1978. Meanwhile, gasoline in parts of the U.S. hit $6 a gallon, while core inflation reaccelerated. The best month for equities in nearly six years, and the worst consumer confidence reading ever recorded. At the same time.
That combination is leaving a lot of investors confused. How does the market keep making new highs when consumers are clearly under this much pressure?
The answer is that the S&P 500 doesn’t reflect the average American consumer. It reflects the asset-owning American consumer. And right now, 45% of household financial assets are in equities - double the long-term average. For that cohort, rising markets create a wealth effect that sustains spending regardless of what’s happening to wages, savings rates, or credit conditions. The index keeps climbing and the people who own it keep spending.
The bottom half of the economy is a different story entirely: Pandemic savings gone, delinquencies rising, entry-level jobs disappearing, and now an energy shock acting as a regressive tax on the households least able to absorb it.
So, the S&P isn’t defying reality. It reflects one reality - the reality of the asset-owning class. This isn’t a post-pandemic anomaly. Capital’s share of national income has been climbing at labor’s expense since the early 1980s. AI didn’t create this divergence, but it is accelerating it. As the first quarter U.S. GDP report showed, capital investment in the AI buildout continues to be the biggest contributor to economic growth, even surpassing consumer expenditures
The danger is in assuming this can continue forever, because the consumer base that ultimately supports corporate revenue is eroding underneath the very market that’s celebrating record margins. And the credit buffer masking that erosion is running out of room.
Record market highs and record lows in confidence aren’t contradictory data points: they’re two sides of the same imbalance. And imbalances eventually resolve.
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Meet Shechar DworskiJeff Bradacs, CFA – Co-Head Equity Strategies, Head of Portfolio Management & Trading
Tom Savage, CFA - Portfolio Manager, Arbitrage
Rob Poole, CFA, Co-Head Equity Strategies, Head of Fundamental Equity Research
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