Americans are in a decidedly bad mood. The stock market is decidedly not.
This isn’t how it usually works. Instead, high stock prices have historically been associated with happy consumers, and vice versa. Here’s a look at what’s going on.
Just how bad is sentiment?
American attitudes just hit a milestone of sorts. On Friday, the University of Michigan reported that its index of consumer sentiment fell to the lowest level ever recorded in 70-odd years of surveys.
Sentiment was already low at the start of this year, but it fell sharply after the Iran war began at the end of February and sent gas prices sharply higher.
Until this year, the previous lowest level was in June 2022, when inflation was running at the highest level in decades. Friday’s sentiment reading was 10% below even that number.
“Prices remain extremely high, labor markets have unambiguously weakened in the last four years, and now we’re in the middle of a war,” said Joanne Hsu, director of consumer surveys for the University of Michigan. “I don’t think the fact that we’re lower than June 2022 should come as a surprise to anyone.”
Just how good are stocks?
But if you look at the stock market, you would never imagine sentiment to be that low. Also on Friday, the S&P 500 notched its eighth consecutive week higher, and the Dow Jones Industrial Average hit a record close for the second day in a row.
And it isn’t just that stocks are high. They also appear really expensive.
The S&P 500 is clocking a valuation of 40.8, as measured by its cyclically adjusted price/earnings ratio. That’s a metric popularized by Yale University economist Robert Shiller, who won an economics Nobel in 2013 for his work on asset prices.
The only other time it was above 40 in the 145 years of Shiller’s data was in the years just before and after the peak of the dot-com bubble in early 2000.
The year 2000 was also when the Michigan sentiment index reached all-time highs. It has never approached even close to those levels since then.
Americans with hefty stock portfolios are on average feeling better than their peers, according to the Michigan survey. But unlike in past periods when stock valuations have been high, they are still relatively unhappy.
So what makes today such an outlier from the way that things usually work? Economists have a few ideas.
Back in 2000
Take the year 2000 as an example, when the typical pattern of strong stock markets and happy consumers held true.
Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University, notes that back then the stock market and Americans were responding to a shared optimism. The economy was growing and adding jobs, and inflation was cool. The Cold War was over, China was opening up and the U.S. government was running a surplus.
Much like today with artificial intelligence, there was a transformational new technology taking hold. But the zeitgeist around the internet was that it would connect the world and improve lives. AI isn’t viewed as positively.
What 2026 feels like
Barbera points to three things that might explain today’s disconnect, none of which is entirely exclusive of one another.
First, stock prices could be out of touch with the fundamentals of where the U.S. economy is headed and in danger of moving sharply lower. In other words, consumers are right to be unhappy.
Second, stocks could be foreseeing a future that many Americans have yet to suss out—one, say, in which the war with Iran ends, inflation eases and growth picks up. In other words, stocks are right to look exuberant.
And third? The biggest thing driving enthusiasm in the stock market lately has been AI, which also has been the source of rising angst among many Americans. A world where companies can use AI to reduce labor costs and dramatically widen their profit margins is good for stocks. But that could also be a world where more people struggle to find work.
“The stock market on the moon and households in increasing gloom are reflecting on the same thing,” Barbera said.
Write to Justin Lahart at Justin.Lahart@wsj.com
