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Stocks Just Hit a Record. Consumers Just Hit a Record Low
The S&P 500 closed at an all-time high on the same day consumer sentiment hit its lowest reading ever recorded. April jobs beat at 115K. But inflation expectations surged to 4.7%. Gas is above $6 in California. One of these two signals is lying about the economy.
What Happened
On Friday, two data points landed that should not coexist.
The University of Michigan released its preliminary May consumer sentiment reading at 48.2. That is the lowest number in the survey's history, below April's already-record 49.8, and below the consensus estimate of 49.7. Sentiment fell across every demographic. Every political party. Every income bracket. Every age group. Every education level.
The same morning, the Bureau of Labor Statistics reported that nonfarm payrolls rose 115,000 in April, nearly double the 65,000 consensus. Unemployment held steady at 4.3%.
The S&P 500 closed at 7,399, a new all-time high, up 0.84%. The Nasdaq rose 1.71% to 26,247, also a record. Both indexes posted their sixth straight winning week, the longest streak since 2024.
Year-ahead inflation expectations inside the Michigan survey surged to 4.7%, the largest one-month jump since April 2025. Long-term expectations climbed to 3.5%, the highest since late 2025. The survey director noted that the Iran conflict influences consumer views "primarily through shocks to gasoline and potentially other prices." California gas is above $6 a gallon.
The Real Story
The stock market and the consumer are living in two different economies
The S&P 500 is up 8% year-to-date. Consumers say the economy is the worst theyve ever seen. Both cannot be right about the same economy. But they can both be right about their own.
The stock market is driven by corporate earnings, which are driven by AI spending, which is driven by five companies with record cash flows. Microsoft, Google, Amazon, Meta, and Nvidia are having the best year of their lives. Their employees are getting richer. Their shareholders are getting richer. The S&P 500 reflects their reality.
Consumers are driven by the price of gas, groceries, and rent. Gas is up 80% from pre-war levels. Grocery inflation is sticky. Rent hasnt come down. Wages are growing but not fast enough to offset the cost increases that the war created. The Michigan survey reflects their reality.
These are not contradictory signals. They are signals from two different economies that happen to share the same country.
4.7% inflation expectations is the number the Fed cant ignore
The Michigan survey is a sentiment indicator. The Fed can dismiss the headline number. What it cannot dismiss is the inflation expectations component.
Year-ahead inflation expectations jumping from 3.8% to 4.7% in a single month is the kind of move that changes monetary policy. The Fed has spent three years trying to anchor inflation expectations near 2%. If consumers start believing inflation will be nearly 5% a year from now, that belief becomes self-fulfilling. Workers demand higher wages. Businesses raise prices to cover those wages. The cycle accelerates.
This is why the Fed has been signaling "higher for longer" on rates. The war pushed oil up 80%. Oil pushed gas up. Gas pushed inflation expectations up. And now those expectations are at risk of becoming unanchored. A rate cut in this environment isnt just unlikely. Its dangerous.
The jobs report beating expectations makes the divergence worse, not better
115,000 jobs added sounds healthy. And it is. But in the context of record-low consumer sentiment and surging inflation expectations, strong employment means the Fed has even less reason to cut rates.
Good jobs data in a normal cycle is bullish. Good jobs data when inflation expectations are unanchoring is hawkish. It means the economy is generating enough demand to sustain price increases. It means the labor market is tight enough that wage pressures persist. It means the Fed stays on hold longer.
The stock market celebrated the jobs number on Friday. It should have paid more attention to the 4.7%.
Market Impact
Bull case
Consumer sentiment and stock prices have historically decoupled. Sentiment bottomed in June 2022 and stocks rallied for 18 months after. Sentiment is a lagging indicator. Stocks are a leading indicator.
115K jobs proves the economy isnt in recession. Corporate profits are growing on AI spending, and profits drive stock prices. Consumers can be pessimistic while companies are making money.
If the Iran deal happens, oil drops, gas prices drop, and sentiment rebounds. The divergence resolves naturally.
Bear case
If consumers cut spending, corporate revenue falls. Record-low sentiment translating into reduced consumption hits Q2 and Q3 earnings. Stocks lead but earnings dont lag forever.
4.7% inflation expectations pushing the Fed toward hold or hike raises the discount rate on equity valuations. If rate cut expectations disappear, 70x semiconductor stocks reprice first.
JPMorgan warned that "increasing signs of demand destruction" from energy prices are coming. Demand destruction is the first stage of economic slowdown.
Already priced in?
Not in stocks. The market completely ignored the sentiment data on Friday and reacted only to jobs. The policy implications of 4.7% inflation expectations will price gradually through the next FOMC meeting in June.
What's Next
The June FOMC meeting is where this divergence gets tested. If the Fed acknowledges the surge in inflation expectations, the market will have to reprice rate cut timing. Futures currently show minimal probability of a cut before September. If the 4.7% reading persists into the final May survey on May 22, September comes off the table entirely.
Watch consumer spending data over the next month. Retail sales, credit card data, and restaurant traffic will tell you whether the sentiment collapse is translating into actual behavior change. If consumers are miserable but still spending, stocks can keep rallying. If spending starts contracting, the earnings forecasts that support 7,400 on the S&P start looking too high.
The gas price is the transmission mechanism. The Michigan survey said it clearly: the war affects consumers through energy prices. If the Iran deal brings oil back to the $80s and gas back below $5, sentiment recovers and the divergence closes from below. If the deal fails and oil spikes again, sentiment drops further and the spending data follows.
Burry wrote on Friday: "Stocks are not up or down because of jobs or consumer sentiment. They are going straight up because they have been going straight up. On a two letter thesis that everyone thinks they understand." Whether he is right or wrong, the observation is accurate. The market is ignoring the consumer. That works until the consumer stops being ignorable. History says that moment comes when spending data confirms what sentiment data is already screaming. The question is not if. Its when.
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