Americans Have Never Been This Pessimistic. The Stock Market Doesn't Agree, and History Says the Market Wins.

For much of the past two years, consumer sentiment has been trending worse. The combination of high inflation, high interest rates, and a K-shaped economic trajectory that has left many households struggling to keep up has done significant damage to consumer confidence.

Now, that confidence level is reaching new lows.

The University of Michigan's Consumer Sentiment Index, which has tracked how Americans feel about the U.S. economy since 1978, fell to 44.8 last month. That's the lowest reading ever since the survey was first produced.

It's lower than June 2022's then-record low reading of 50, which arrived while the S&P 500 was well into a 25% bear market.

It's lower than the worst months of the 2008 financial crisis, when unemployment was touching 10%, banks were failing, and the S&P 500 was falling by more than 50%.

It's lower than May 1980, when interest rates were 20% and the stagflation of the 1970s kept the economy struggling for a decade.

In every one of those prior instances, poor consumer sentiment and sharp stock market declines correlated. When people felt miserable about their situations, falling stock prices usually followed.

This time, however, the Vanguard S&P 500 ETF (NYSEMKT: VOO) just set a series of new all-time highs. The index is on pace for its fourth consecutive year of double-digit gains.

That divergence -- the most pessimistic consumers have been in nearly 50 years while stocks are hitting record highs -- has no historical precedent.

For investors, it's important to understand what this dichotomy could signal for stocks.

Image source: Getty Images.

Historically, poor consumer sentiment and poor stock market performance are highly correlated

To put May 2026's reading in context, consider every prior period where consumer sentiment fell below 60. In total, there are four major instances going back to 1978:

May 1980: 51.7. The economy was in recession and interest rates were soaring. The S&P 500 (SNPINDEX: ^GSPC) was still recovering from a deep bear market in the early 1970s and down 17% from its prior peak.

November 2008: 55.3. Lehman Brothers had just collapsed and the financial crisis was deepening. The S&P 500 was down more than 40% and still falling.

August 2011: 55.8. The U.S. debt ceiling fight scared investors and the S&P 500 fell roughly 19% in a matter of weeks. Sentiment was already falling, but both recovered by the first half of 2012.

June 2022: 50. This was the prior all-time low. The S&P 500 at the time was down more than 20% as the Federal Reserve was hiking rates aggressively to counter inflation that hit 9%.

In each of those four cases, consumers and the stock market were generally aligned. Conditions were either bad or deteriorating, and stocks reflected that.

Today, the S&P 500 is up roughly 40% from its April 2025 low and is currently at an all-time high.

These two numbers have never been this disconnected.

Why sentiment and stocks are telling different stories

This is probably a good time to remind you of the quote "the economy isn't the stock market." The same thing applies to consumer sentiment. While the two are inextricably linked, it's possible for one to move without the other. There are so many factors at play that any of them can break a previously accepted notion.

Looking at the current economy, three potential reasons stand out for why stocks and sentiment are headed in opposite directions.

The K-shaped economy

The top 10% of earners account for around half of U.S. consumer spending. That means a small percentage of people in the U.S. account for much of what's happening in the economy. Even though many people are struggling with inflation and the cost of living, the economy can still grow, since they account for a smaller percentage of overall activity.

The consumer sentiment survey tends to be based on a better cross-section of households, which provides a better representation of what the "average" consumer is feeling.

The artificial intelligence (AI) boom

The emergence of artificial intelligence (AI) is creating an unprecedented shift in how the global economy operates. Companies that are implementing AI in their processes are seeing better efficiency, which potentially frees up capital and improves overall financial results.

That could, however, result in less-specialized workers seeing their jobs either at risk or eliminated altogether. Consumers end up feeling more skeptical about their personal situations, but corporations are seeing earnings growth opportunities.

Strong corporate earnings

The S&P 500 is on pace to report 28% year-over-year earnings growth in Q1, powered by the tech sector. That would be the biggest 12-month gain since 2021.

It's easy for stock prices to move higher with that kind of tailwind, even if some of it is coming at the expense of workers and their own financial situations.

But the best signal for what comes next might come from seeing how sentiment and stocks did following previous lows. The answer: pretty darn well!

Data source: University of Michigan, S&P 500.

In each case, sentiment readings improved sharply over the subsequent 12 months and the S&P 500 rose by more than 15%. It turns out that historically low consumer sentiment readings became something of a "buy low" signal for investors.

But we don't really have a precedent for what might happen after stocks have gained more than 30% in the 12 months leading up to this. And it's unwise to put too much weight into just four historical data points.

But there is a takeaway here. When consumer sentiment gets this low, history suggests there's potential for big stock market gains ahead.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.