Published June 6, 2025
While stock market valuations are clearly on the high side and there is no shortage of economic angst in the air, there is one indicator that is foretelling strong stock market gains ahead. Consumer sentiment has been tanking since the pandemic hit in early 2020. After recovering in 2023, sentiment has soured once again with the economic uncertainty of 2025. Delta Research recently posted a chart of consumer sentiment noting that a very low consumer sentiment reading leads to buoyant stock gains over the ensuing twelve months. Fueling this move in stocks could be an economy that holds up better than anticipated while inflation remains steady, giving the Fed room to lower interest rates.
Here is Delta’s note:
“The S&P 500 edged higher this week, sitting just 3% below its all-time high. Despite weaker economic data, the stock market has shown remarkable resilience.
The May ISM Manufacturing Index, reported on Monday, dipped to 48.5% from 48.7% in April, indicating a slightly faster contraction in manufacturing. The ISM Services PMI, reported on Wednesday, fell to 49.9% in May from 51.6% in April, below the expected 52%. This marks only the fourth time in the last 60 months that the Services PMI has dropped below 50.0%, signaling contraction.
Together, manufacturing and services account for approximately 90% of the U.S. economy’s activity. Contraction in both sectors would typically pressure the stock market lower.
Surprisingly, one factor supporting market resilience is consumer sentiment, which has been near its lowest level since 1971. Historically, such lows (1975, 1980, 2008, 2011, and 2022) have preceded strong 12-month market gains of 22.2%, 20.0%, 22.2%, 15.4%, and 17.6%, respectively.
Additionally, the Atlanta Fed’s GDPNow model forecasts Q2 GDP growth at 3.8% far exceeding consensus expectations of ~1%. This divergence, combined with low consumer sentiment, could spark a positive market reaction. Note that Q1 and Q2 GDP readings may be skewed by tariff-related front-running, which has disrupted typical import/export patterns. April’s trade deficit, for example, plummeted to $61.6 billion from $138.3 billion in March. While GDP calculations have complexities, a headline 3.8% growth figure in a subdued sentiment environment could drive market optimism.”
Market Update
Stocks opened the week with a +0.7% gain in the Nasdaq ignoring trade flareups from both East (China) and West (Europe), a small push higher in interest rates, and some weak economic reports. Another +0.8% boost in the Nasdaq Tuesday with strength in semiconductors. A flat day Wednesday despite a notable dip in interest rates. Thursday saw stocks pull back -0.5% almost solely on a -14% plunge in Tesla shares when President Trump and Elon Musk got into a public spat. By Friday morning things seemed to have settled down. Tesla shares rebounded a bit and small cap stocks rallied. Interest rates shot upward as the monthly jobs report came in better than expected. All-in-all investors clearly have been pleased with the quarter’s earnings reports and have become less concerned about the economy going forward, in part due to seemingly productive tariff discussions with China. The Atlanta Fed’s GDPNow forecast projects a very strong rebound in economic growth in the second quarter further supporting the positive mood among investors.
It was another solid week for the stock market with the S&P 500 closing just shy of the 6000 mark, a gain of +1.65% for the week. The Nasdaq 100 (QQQ) rose +2.08 while small cap stocks finally showed some relative strength gaining +3.33%.
Warm wishes and until next week.