There is a widening range of sentiments between individuals and business owners. The question is who is right, and is perception reality?

As we have mentioned in past Updates, consumers have only been this dire about the economy and their financial future in three other periods since 1978.  To understand how discouraged consumers are, one would have to look at periods like 2022 when the Federal Reserve crushed the real estate economy with 11 consecutive rate increases, 2008 when the US was facing a potential economic collapse, and 1970s, a period of hyperinflation, double-digit unemployment, and top Federal tax bracket of 70% for those earning over $108K.   Below is a chart of the Consumer Confidence Chart from 1952 based on data research from the University of Michigan.

These same Eeyores are experiencing the lowest unemployment rate since the 1960s, more people working in the history of this country, wage growth above inflation, and 7.437M more jobs than applicants, which remains a record level since 2000 when the Bureau of Labor Statistics started monitoring job openings. 

Meanwhile, business owners, who are indirectly or directly dependent on consumer spending, have turned very bullish on their future.  The National Federation of Independent Business (NFIB) reported that the NFIB Small Business Optimism Index soared in recent months and fell from recent highs to 100.3 in July.  The index is now slightly above the 52-year average and the highest in five months.  More importantly, small business owners’ sentiment has improved significantly from low levels recorded during the period of mid-2022 up to September of last year. 

Bill Dunkelberg, NFIB Chief Economist, stated in the report,

• “Optimism rose slightly in July with owners reporting more positive expectations on business conditions and expansion opportunities.”

Jeff Burdett, NFIB State Director, stated in the report,

• “With hopes that the business environment will improve and that there will be more opportunities to expand, our members are feeling more optimistic about the future,”

Mr. Burdett also commented on one primary issue concerning small business owners: finding qualified employees for their company.  He stated,

• “While finding qualified applicants remains a real challenge for Main Street, there’s no doubt that making the 20% Small Business Deduction permanent has played a significant role in boosting small business owners’ enthusiasm.” 

So, consumers are more discouraged in recent history, while business owners are expecting increasing sales from their “woe is me” customers.

CEOs of the largest companies are also enjoying a period of optimism.  Record-breaking earnings will help.  Today, David Kostin, Chief U.S. equity strategist for Goldman Sachs, reported that this past quarter has been one of the greatest frequencies of earnings exceeding projections.  He stated in his report,

• “Of the 92% S&P 500 companies that have reported, 60% have beaten consensus earnings per share forecasts by more than a standard deviation of analyst estimates, according to data from the firm. That signifies the “highest rate in our 25 years of data history outside of 2009 and the COVID reopening,”

Mr. Kostin acknowledges the low earnings bar set by analysts earlier this year due to the aggressive tariff policy proposed by President Trump; tariffs do not appear to be a hurdle for companies to continue growing their sales and profits.  He stated,

• “While we expect companies will generally be able to mitigate tariff costs and maintain their profit margins, the magnitude of margin expansion embedded in consensus estimates appears unrealistic,” he continued. “We expect the strong recent trajectory of analyst earnings revisions to weaken going forward, but no more than the average downward trend of the last few decades.”

Based on the latter part of his statement, Mr. Kostin expects Wall Street to be disappointed with the next quarter’s earnings reports, but nothing outside of past experiences.

So, it remains to be seen who is right.  Consumers and their negative outlook on the future, or the optimism of business owners.  The irony is that the future of sales and growth for businesses is dependent on consumer spending that represents 66% of the US economy.  Either business owners know something that consumers don’t know about themselves, or sales will decline as consumers remain cautious with their spending.  As the year approaches the holiday season, let's see if consumers rally in their sentiment as the issues of tariffs, the Ukraine war, and inflation fade over time.

What Does This Mean to Me?

Institutional investors are also in an upbeat mood.  The US stock market has experienced a strong rally since bottoming on April 8.  Below is a chart of the major US indices and the MSCI Ex US index.  The Mid Cap S&P 400 and Small Cap S&P 600 trail well behind the Large Cap S&P 500 and tech-heavy NASDAQ YTD.  So far this year, investors have been better off in the Vanguard Bond Index over the mid and small-cap sectors.

We maintain our favorable view on the US economy and stock markets.  Let us know if you have any questions about this UPdate or your account.  We welcome the opportunity to assist you and your family with your financial goals.