Consumer Sentiment Plunges To All-Time Lows on Iran War. Why Are Markets At Record Highs?

It only takes a quick drive around the neighborhood to notice that prices have changed since the war in Iran began two months ago.

The average price of a gallon of regular gasoline across the country remains above $4, up more than $1 from the beginning of the year, and diesel prices have soared as well, impacting the costs of everything from food to retail goods to heating oil and jet fuel.

Concerns around the spike in gas prices were made plain by the latest consumer sentiment survey from the University of Michigan as its Index of Consumer Sentiment fell 6.6% from March to 49.8, its lowest reading in the more-than-60-year history of the survey.

Survey Director Joanne Hsu observed, "The Iran conflict appears to influence consumer views primarily through shocks to gasoline and potentially other prices. In contrast, military and diplomatic developments that do not lift supply constraints or lower energy costs are unlikely to buoy consumers."

The index of consumer expectations fell 7% form March as well, and inflation expectations for the next year went up from 3.8% to 4.7%, showing consumers are already anticipating higher prices.

Image source: Getty Images.

Stocks are going in the opposite direction

While consumers are nervously watching prices go up, stocks are having a phenomenal month.

Month-to-date through April 24, the S&P 500 (SNPINDEX: ^GSPC) is up 9.8%, and hit a record high on Friday, following a surge in semiconductor stocks on strong quarterly results from Intel.

Stocks have surged through April with ceasefires in effect in both Iran and Lebanon, though the Strait of Hormuz remains blocked. Still, investors now believe the worst-case scenarios from the war are off the table, including a conflict that spreads to the region or destruction to Middle East energy infrastructure continuing. While the situation in the Strait of Hormuz remains an impediment to peace, investors seem optimistic that it will be resolved.

Stocks have also surged even as consumer sentiment hits record lows because the stock market is being driven by the AI boom, which is insulated from consumer spending. In recent weeks, chip stocks that make CPUs, including Intel, Advanced Micro Devices, and Arm Holdings, have soared as demand for Agentic AI is expected to drive increased demand for CPUs.

Investors shouldn't ignore consumer sentiment

While AI demand can continue to grow, even as consumers are fed up with the economy, it's a mistake for investors to ignore consumer behavior.

After all, consumer spending is responsible for roughly 70% of GDP in the U.S., and a slowdown in spending could lead to a recession. Still, one sentiment survey shouldn't change your investing decisions, but it is a reason to pay closer attention to economic reports like retail sales and inflation that give a better snapshot of consumer behavior than sentiment alone.

With valuations already looking stretched and the Strait of Hormuz still locked up, the recent recovery in the S&P 500 is fragile. Weakness at the consumer level could be enough to cool off the scorching-hot stock market.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.