Great Divergence: Historically High U.S. Stocks and Historically Low Consumer Confidence

Great Divergence: Historically High U.S. Stocks and Historically Low Consumer Confidence.

A huge gulf has emerged between U.S. stock market performance and public sentiment.

According to survey data jointly released by the University of Michigan and Gallup, in the past six years, the S&P 500 index has soared 130%, hitting a record high; while the consumer confidence index, which represents the fundamental feelings of ordinary people, plummeted to 44.8 in May, hitting the lowest level in more than 70 years.

This unusual divergence has caused many people to wonder: Why have consumer confidence indicators fallen to historic lows, but U.S. stocks continue to hit record highs? 1. Carnival US stocks and depressed consumers While the S&P 500 and Nasdaq 100 hit record highs, champagne was flowing freely on the trading floor, and U.S.

President Trump posted on Truth Social to celebrate the stock market's surge, pessimism spread like wildfire outside Wall Street, with consumer confidence falling to a record low. Market confidence in the stock market is at an extremely optimistic level, with about 50% of investors expecting stock prices to continue to rise in the next 12 months.

This confidence is near a 30-year high, even higher than during the dot-com bubble in 2000. At the same time, the U.S. consumer confidence index points in the other direction.

The Conference Board confidence index fell to 93.1 in May, and the consumer confidence index released by the University of Michigan dropped 24% from a year ago, almost the same level as during the worst period of the financial crisis.

The contrast between Wall Street's wealth binge and consumers' deep anxiety shows that the wealth created by the stock market has not translated into economic security for ordinary families. While investors have reaped record returns and stock wealth owned by U.S.

residents has grown by $15 trillion since 2025, the psychological state of consumers has plunged into deep pessimism. This is the textbook definition of the K-shaped economy: the wealthy are partying while the working class are struggling to make ends meet. Goldman Sachs' latest consumer tracking report issued a clear warning: U.S.

household income, cash flow and consumer confidence are deteriorating simultaneously. Among households that do not hold stocks, the proportion of consumers who believe that high prices are a drag on their personal finances has reached 72%, and this proportion is constantly rising.

The wealth effect brought about by record stock prices is mainly concentrated at the top of the social wealth pyramid and has little bearing on ordinary people.

Data from the Federal Reserve shows that the top 10% of households own about 87% of personal holdings, and these household consumption account for nearly 50% of all household consumption expenditures in the United States.

For the bottom 50% of households, the S&P 500 index reaching 7,600 points is just an abstract concept, but the affordability issues caused by prices, employment, living standards and future uncertainty are closely related. In contrast to the historical lows in consumer confidence, there are historical highs in stock market valuations.

Using the cyclically adjusted price-to-earnings ratio (CAPE) popularized by Nobel Prize winner Robert Shiller, the S&P 500 is currently valued at 40.8 times. In the 145-year data series, this indicator has exceeded 40 times only once - around the peak of the dot-com bubble in 2000.

The year 2000 happened to be the highest point in the history of Michigan's consumer confidence index. Obviously, there are significant differences between the current economic situation under the AI wave and the era of the Internet wave.

Soaring stock prices coincided with widespread consumer optimism, strong economic growth, good employment, benign inflation, a relatively stable geopolitical environment following the end of the Cold War, and investors attracted by the promise of change brought about by the Internet. The U.S.

economy now faces a strange situation: while people are betting that stocks will continue to rise, they are also despairing about their economic prospects, which outlines a picture of a huge macroeconomic paradox. 2.

Two completely different economic worlds “The stock market does not represent the economy” has never been more true, as people are now witnessing the rise of two distinct, parallel economic worlds. One is the real economy, which is the world of small businesses, manufacturing and consumer confidence.

It is plagued by high borrowing costs, rising oil prices, supply chain frictions and stagnant real wages. Key indicators include the Philadelphia Fed Manufacturing Index, Small Business Optimism Index and credit card delinquency rates, all of which have raised warning signs.

The other is the financial economy, which is a world driven by AI, stocks of large AI companies, corporate buybacks, and institutional capital. Stocks are supported by the technology sector's strong balance sheets, massive share buyback programs and global capital seeking growth in a low-growth global environment.

Its health is measured by corporate earnings (often boosted by cost cutting rather than revenue growth) and inflows into risk assets. A huge divide began. For 15 years, Americans' income has been lower than their expectations based on historical models. The real income of the bottom 30% of people has not increased in 25 years.

The once "American Dream" is fading away. The average personal savings rate in the United States has been falling since the 1980s, from 13% to just 4%. However, stock markets and corporate profit margins are rising, and they are near all-time highs.

To understand why stocks continue to rise while others struggle, we need to look at changes in the relative proportions of corporate profits and worker compensation. In the first quarter of this year, the proportion of U.S. labor compensation in gross national income (GDI) dropped to 51%, the lowest level since records began in 1947.

At the same time, domestic corporate profits accounted for 12.1% of total national income from 7% in the late 1990s, reaching the highest point since 1950. Since the end of 2019, inflation-adjusted hourly wages have increased by just 3%, while corporate profits have soared by 50%.

This trend of distribution imbalance began to appear in the early 21st century and accelerated after the epidemic. While GDP growth remains resilient, labor compensation has stagnated, in part because capital expenditures driven by the AI wave are less labor intensive.

For ordinary workers, the application of AI and the cost reduction and efficiency improvement of enterprises have, to a certain extent, intensified their general panic about their jobs being replaced. The hidden weakness of the job market has further dampened the confidence of low- and middle-income groups.

Unlike working-class people, wealthy shareholders do not spend most of their income on consumption. On the contrary, most funds will flow back into financial assets such as stocks and real estate, forming a positive feedback loop. They plowed their profits back into financial assets as prices rose, driven by record corporate profits and shareholder returns.

These financial assets create more profits and therefore they gain more wealth. According to statistics, the ratio of U.S. financial assets (Wall Street) to GDP (real economy) has reached 6.5 times, a record high.

The gulf between Wall Street and Main Street is so wide that Dario Amodei, CEO of artificial intelligence giant Anthropic, warned: "What is really worrying is the excessive concentration of wealth, which will undermine the foundation of society." 3.

Three major reasons for the differentiation between the stock market and entities This economic anomaly, in which the real economy is faltering while the financial economy is booming, is not driven by a single factor but by a powerful confluence of three structural forces that together create a self-sustaining financial ecosystem that is increasingly disconnected from the real economy.

One is the expansion of global liquidity. Having learned the lessons of the 2008 global financial crisis and the 2020 COVID-19 pandemic, central banks are now permanently “headwinding”, with any sign of significant market stress triggering immediate intervention. Over the past 20 years, the global broad money supply has grown at an annual rate of 16%.

As of May 2026, the size of the Fed's balance sheet is approximately US$6.7 trillion, compared with approximately US$900 billion before the 2008 financial crisis. The excessive balance sheet size has caused excessive distortions in the financial market.

Although new Fed Chairman Kevin Warsh has officially put balance sheet reduction on the agenda, the "Fed put" - the implicit guarantee of support - is considered stronger than ever. This created moral hazard on an unprecedented scale, with investors being indoctrinated into a "buy the dip" mentality that central banks would not allow a systemic collapse.

In addition, sovereign wealth funds and corporate cash reserves sitting on trillions of dollars act like a non-stop bidding machine for assets, pumping huge amounts of liquidity into the market that must find a home regardless of economic fundamentals. The second is artificial intelligence and the illusion of productivity.

The apparent investment momentum of the U.S. economy is now increasingly focused on AI and technology infrastructure, including chips, data centers, cloud equipment, servers, data centers, etc.

Since 2024, the contribution of this part of investment to GDP has increased rapidly, reaching close to more than 1% by around 2026, becoming the most important source of support for the investment side.

AI-related capital expenditures are based on this logic: demand for large models explodes, cloud vendors’ capital expenditures rise, data centers expand, and hardware orders are fulfilled. However, a large amount of AI computing power demand ultimately points to two companies, OpenAI and Anthropic, which together account for more than 50%.

If these companies cannot sustain financing, continue to achieve rapid revenue growth, and cannot convert users into sufficiently high paying capabilities, then they will not be able to support the computing power contracts they have signed. In other words, the entire U.S.

stock market is actually based on continued growth expectations brought about by the skyrocketing revenue of two or three companies. This is the most fragile link of the AI boom. Since the concept of "Seven Heroes of U.S. Stocks" became popular in 2023, capital grouping has become an iconic feature of the U.S. stock bull market.

At that time, only a few giant technology stocks drove the index upward, and the vast majority of individual stocks performed weakly. Now the market is further focused. Since the beginning of this year, 70 cents of the US$1 increase in the S&P 500 index has been driven by 41 AI stocks.

The market value of these stocks has accounted for nearly half of the total market value of the S&P 500. A significant number of these stocks are priced not based on current earnings, but on the transformative potential of artificial intelligence to drive future productivity booms.

This narrative is so powerful that it masks the current weakness in consumption. The third is the feedback loop of passive investment. Currently, more than 50% of the U.S. stock market capitalization is held by passive funds (ETFs and index funds). This creates a powerful, mechanized flow of capital that is not affected by valuations or economic data.

Every dollar invested in an S&P 500 ETF automatically buys more of the largest, most expensive stocks, driving up their prices simply because of their size rather than their prospects. This creates a self-reinforcing cycle: rising prices attract more passive inflows, pushing prices even higher. The number of ETFs in the U.S.

market currently exceeds the number of stocks, attracting more than $400 billion in net capital inflows last year and is expected to attract more than $500 billion in net capital inflows this year.

Of course, this is a virtuous cycle when the market is rising, but it can be a trap when the market is falling, because outflows can have the same self-reinforcing effect. 4. Prudence in the Era of “Irrational Exuberance” The Great Divergence shows the power of mobility, AI narratives and structural change.

It’s dangerous to buck the trend, but it’s equally dangerous to ignore the obvious warning signs. Investors are betting that AI will bring huge efficiency improvements and new revenue streams, which will eventually push overall valuations to inflated expectations.

This is a huge bet on a future that is not yet here, and the current market is built on a narrow and fragile foundation. Consumer spending accounts for about two-thirds of U.S. GDP and is the core engine of the U.S. economy.

Consumer confidence has fallen to historical lows, coupled with rising debt pressure and damage to real purchasing power, which means that downside risks to the consumer side and the economy are accumulating. The Great Divergence cannot last forever. Either the market falls to adapt to the economy, or the economy rises to adapt to the market.

The key question is which scenario will ultimately occur. One scenario is a hard landing, where there is a market decline and a recession, which is the most worrisome outcome. U.S. inflation is already in a relatively high range and the trend is worrying.

The Federal Reserve may need to take action soon to curb the upward pressure on inflation, which will eventually trigger a delayed recession.

Corporate profits fell, the revolutionary narrative of artificial intelligence faded as results failed to live up to expectations, and the feedback loop of passive investing reversed violently, causing relevant markets to plummet or even collapse.

The other scenario is soft convergence, where the market moves sideways and the economy moves upward into the so-called "golden scenario." Inflation normalizes, the productivity boom brought about by artificial intelligence gradually emerges, and corporate profits grow to current valuation levels.

This will cause the market to enter a prolonged period of volatility or flat earnings. The third scenario is a big acceleration, that is, the market rises and the economy rises, which is an optimistic outcome.

The AI revolution is delivering on its promise faster and more broadly than expected, unleashing a wave of productivity that is driving prosperity across all sectors of the economy. In this world, today's high valuations will look like a good deal in hindsight. Therefore, a smart investor today must be a realist, not just an optimist or a pessimist.

This means both staying invested to participate in the rally but also building a strong defense against the inevitable liquidation. Therefore, look beyond superficial indices and focus on the underlying health of the market. The most important thing is that in the period of great differentiation, the old rules no longer apply.

The only thing that remains unchanged is that self-discipline and active risk management measures must be taken. As Keynes said, market irrationality may last longer than your solvency, but it cannot last forever.

Investors' strategies must be able to cope with this state of "irrational exuberance" and dance with the bubble, but also be prepared for the eventual return of the market to rationality. (The author Shi Donghui is a professor at the School of International Finance, Fudan University) (

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