The stock market is not ignoring reality; it is pricing a different reality than most consumers are living.
KEY TAKEAWAYS
Wall Street’s bullishness has become loud, with major firms raising S&P 500 targets toward the 8,000 range. That may look like cheerleading, but the earnings backdrop gives them a real case.
Corporate earnings have been exceptionally strong, with broad beats across both earnings and revenues. The rally is not simply market fantasy; it is grounded in actual corporate results.
AI is moving from promise to profit, especially among hyperscalers with diversified revenue streams. The productivity story is now showing up in margins and earnings expectations.
Consumer sentiment is flashing real stress beneath the surface. Rising prices are causing households to cut back on ordinary discretionary purchases.
The market and the consumer economy are telling two different stories at the same time. Stocks can keep working, but consumer fatigue becomes dangerous if it moves from delayed spending to abandoned spending.
MY HOT TAKES
The S&P 500 is not crazy; it is just not your grocery receipt. Markets are pricing earnings power, while households are living inflation pressure.
AI is no longer just a pitch deck story for the big platforms. For the hyperscalers, it is starting to look like an earnings machine.
Wall Street’s 8,000 calls are not automatically ridiculous. The ridiculous part is pretending that a higher index means everyone is doing fine.
The consumer is not broken yet, but stretched is not the same as healthy. That distinction matters a lot.
This is a capital-first cycle. Equity owners are on the right train, but the conductor still needs consumers to keep buying tickets.
You can quote me: “When every major firm on Wall Street is pointing in the same direction, that is either deep conviction or the most expensive group hug in financial history.”
Two of a kind. I sometimes feel like I am writing some sort of abstract description of some other economy–especially when I see the sea of green on all my screens. Yesterday, I wrote about filling my wife's car for $100. What I didn't tell you was that I was on the way to the grocery store to collect the ingredients for what should have been a modest dinner. The tab for my basket was anything but modest. My friends, if I feel it, I KNOW THAT YOU ARE FEELING IT.
And the economic numbers support that feeling. Not always on the surface, but one doesn't have to dig too far down to find a strong counter-narrative in most of the releases these days. Based on all that, one would expect to find the stock market struggling to keep its head above water. But, alas–and I am sure you know–the stock market appears to be anything but struggling. In fact a growing cadre of bulge bracket investment banks have ratcheted up their 12-month targets for the S&P 500. Feedback from my blog posts and videos are littered with: "check the market!" Are you wondering how this could be? Sure, you are.
Let me start with the Wall Street consensus, because it is worth understanding just how loud that chorus has become. Goldman Sachs just raised its year-end target for the S&P 500 to 8,000, up from 7,600. Morgan Stanley is at 8,000 as well, with a twelve-month look-ahead target of 8,300. Yardeni Research is at 8,250. Oppenheimer sits at 8,100. The S&P closed Tuesday near 7,516, which means these targets imply somewhere between six and ten percent more upside from here. When every major firm on Wall Street is pointing in the same direction, that is either deep conviction or the most expensive group hug in financial history. 🤣 I will let you decide. But before you dismiss it as Wall Street cheerleading, let me tell you why they are not wrong.
The earnings coming out of Corporate America this quarter have been, frankly–and I have no other way to state this–stunning. First-quarter earnings growth for the S&P 500 is tracking at over 27%--the strongest reading since the Q4 of 2021. 84% of companies that have reported beat their earnings estimates, which is well above both the five-year and ten-year historical averages. Revenue beats have been equally remarkable, with 81% of companies topping revenue estimates–the highest percentage since the Q2 of 2021. Nine of eleven market sectors are growing earnings year over year, and seven of those nine are doing it at double-digit rates, led by technology, communication services, and consumer discretionary. These are not soft numbers dressed up by financial engineering. These are real results from real companies. The market is not delusional. It is responding rationally to what corporate America is actually producing.
So what is driving it? You already know the answer. Artificial intelligence is not a promise anymore, it is showing up in margins. The hyperscalers, your Amazons, your Microsofts, your Metas, your Alphabets– they are printing money from AI-related services, and their diversified business models mean the bet is cushioned by revenue streams that existed long before the first GPU cluster was switched on. The productivity gains from AI are flowing directly into the earnings per share calculations that Wall Street economists use to justify their price targets, and right now, those calculations are working. I have said before that there is a crucial distinction between the hyperscalers and the pure-play AI infrastructure names–the companies whose entire capital structure depends on a single thesis holding forever. The 1990s had a word for that: CLECs. But that conversation is for another day. Today, the engine is running, and the earnings prove it.
Here is where it gets complicated, and where I think the real tell is hiding.
That engine is powerful, but it is not running for everyone equally. The Conference Board released its May consumer confidence numbers yesterday, and the headline–a modest dip of 0.7 points to 93.1–looked almost serene by comparison to what is happening beneath it. Look inside the report and a very different story emerges. The Present Situation Index, which measures how consumers feel about conditions right now, fell 3.2 points. The proportion of consumers who described current business conditions as "good" dropped from 22% in April to 18.5% in May. That is a meaningful deterioration in real-time sentiment that the headline number quietly absorbed. Meanwhile, the University of Michigan's Consumer Sentiment Index has now fallen to a record low of 44.8–the third consecutive monthly decline–with 57% of consumers spontaneously volunteering that rising prices are eroding their personal finances. Not asked. Volunteering. And the steepest declines in that survey are concentrated among lower-income households and those without college degrees. That is not a statistical footnote, my friends. That is a portrait of the economy that most Americans are actually living in.
The Conference Board's special survey questions this month drove the point home even further. Two-thirds of consumers said they are cutting back on spending because of rising prices. Read that again, please. 👈👀 Most are buying fewer items. Many are delaying the purchases they want, as opposed to the ones they need, and planning to circle back in the next six months. They are economizing on clothing, footwear, hobby items, games, and toys. Think about that for a moment. These are not luxuries in the traditional sense. These are the ordinary pleasures of ordinary life, and people are pulling back on them because filling a gas tank and a grocery basket is consuming the budget!
So how do you reconcile the two? A stock market marching toward 8,000 and a consumer who just told you she is skipping the new pair of sneakers? The answer is that you stop trying to make them the same story, because they are not. The stock market is pricing an AI-powered earnings machine that is, right now, delivering. The consumer economy is absorbing an energy-driven inflation shock that is, right now, painful. Both of those things are simultaneously true. The mistake–-and it is a costly one–is to look at the S&P and conclude that the economy is fine, or to look at the Michigan sentiment number and conclude that the market is going to collapse. Neither conclusion is warranted! 🤯
What the market is really telling you is that the gains from this particular cycle are accruing to capital first. If you own equities, and most of you reading this probably do, you are, to some degree, a passenger on the right train. The AI productivity revolution is real, it is showing up in earnings, and Wall Street economists are not hallucinating when they point to 8,000. But the consumer is two-thirds of this economy, and right now that consumer is tired, stretched, and cutting back on sneakers and board games. The moment that fatigue moves from sentiment surveys into actual spending data–not just delayed purchases, but abandoned ones–is the moment the earnings model has to reckon with the world the rest of us live in. That moment has not arrived. But it bears watching with both eyes open.
For now, I remain constructive. The earnings foundation is real, the AI story has moved from narrative to numbers, and the market has reasons to go higher. Own your equities. Understand why they are working. And keep one eye on the consumer, because in the long run, Corporate America cannot outrun the people it sells to.
YESTERDAY’S MARKETS
The S&P 500 rose 0.61% to close at 7,519.12, and the Nasdaq surged 1.19% to a fresh record, while the Dow slipped 0.23% as energy, healthcare, and consumer staples weighed on the blue chips. The 10-year Treasury yield eased roughly five basis points to 4.50%, as investors returned from the long weekend with cautious optimism that a US-Iran agreement may still be within reach. Brent crude fell approximately 5.4% on the day to close near $94.82, its sharpest single-session drop in weeks on the same Iran de-escalation hopes.
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