US stocks hit record highs as consumer sentiment hits a 70-year low

The S&P 500 capped its eighth straight week of gains on Friday, hitting a record high even as a key survey showed American consumer sentiment just collapsed to the lowest level ever recorded in its 70-year history.

"Prices remain extremely high, labor markets have unambiguously weakened in the last four years, and now we’re in the middle of a war," Joanne Hsu, director of consumer surveys for the University of Michigan, said. "I don’t think the fact that we’re lower than June 2022 should come as a surprise to anyone."

The Dow Jones Industrial Average also closed at a new record for the second consecutive day, with the S&P 500 ending up 27.75 points at 7,473.47. In stark contrast, the University of Michigan's sentiment index fell to a record low, 10 percent below the previous bottom set in June 2022 when inflation was peaking. The divergence is also reflected in valuations, with the S&P 500's cyclically adjusted price-to-earnings ratio hitting 40.8, a level only seen during the dot-com bubble.

This disconnect presents a puzzle with three potential solutions: either the stock market is disconnected from economic reality and due for a correction, it is correctly pricing in future growth that consumers don't see, or the AI boom driving stocks is the same force creating anxiety about job security for households.

AI Fuels Market Exuberance

The market's ascent is being powered by enthusiasm for artificial intelligence, which investors believe will dramatically widen corporate profit margins. This has pushed technology stocks higher and fueled a broader rally. In New York, the Nasdaq composite was up 50.87 points at 26,343.97. However, unlike the internet boom in 2000, which was viewed with widespread optimism, the rise of AI is being met with public angst about its potential to displace workers and increase inequality.

"The stock market on the moon and households in increasing gloom are reflecting on the same thing," Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University, said.

Consumers Feel the Pinch of Inflation

While investors celebrate, consumers are grappling with persistent inflation. The July crude oil contract was up 25 cents to $96.60 per barrel, keeping gasoline prices elevated. According to the Michigan survey, U.S. consumers now expect inflation will worsen to 4.8 percent over the next year.

This pressure is crowding out other spending. "What we’ve seen in the preliminary data is that higher gasoline prices are starting to crowd out the consumer’s more discretionary purchases," said Lesley Marks, chief investment officer of equity at Mackenzie Investments. The market's performance is also being watched alongside movements in other assets, with the U.S. dollar holding firm and 10-year Treasury yields remaining a key focus for investors gauging the path of interest rates.

This article is for informational purposes only and does not constitute investment advice.