A week of gains, the American consumer sighs as the stock market rallies

Automatic translation: Originally published in Finnish 25/05/2026, 05:13 GMT. Give feedback here.

The US stock market and consumer sentiment are showing an unprecedented divergence, which also raises questions about the market's true valuation level.

Last week was an upward trajectory for the US and European stock markets. The war in Iran has lasted almost three months, but hopes for its resolution supported the indexes. Iran was also clearly present in the morning's news flow: according to President Donald Trump, the US embargo in Iran remains in place and there is no hurry regarding the Iran agreement. This weighed slightly on expectations of a quick resolution. Secretary of State Marco Rubio, in turn, stated that a "good deal" would be made with Iran or an agreement would be sought through alternative means.

US: Consumer confidence indexes

Source: LSEG

In the US, a large gap has opened up between consumer sentiment and the stock markets, as the WSJ recently reported. The University of Michigan's consumer confidence index fell last Friday to its lowest level in 70 years of measurement history. The index decreased by 10% from its previous low in June 2022, when inflation had accelerated to a historical high. The war in Iran, which began at the end of February, and the subsequent sharp increases in gasoline prices have further eroded consumer confidence.

At the same time, the stock markets have been celebrating. The S&P 500 index has risen for eight consecutive weeks, and the Dow Jones has broken its historical peaks. It's not just about high levels – valuation multiples are also exceptionally tight, and the S&P 500's cyclically adjusted P/E ratio (Shiller P/E) is 40.8. This level has been exceeded only once in 145 years of history: at the peak of the dot-com bubble in 2000.

Source: WSJ

In 2000, however, the situation was the opposite for consumers, as consumer confidence was also at its peak. At that time, both markets and consumers shared the same optimism: the economy was growing, inflation was low, and the internet was seen as a unifying force for the world. Now, the situation is completely different, as inflation is rampant and geopolitical tensions have increased.

In addition, explanations for the current situation can be found through the market. Firstly, the stock markets may have completely detached from economic fundamentals, and a correction could be ahead. Secondly, markets tend to anticipate a future where the war in Iran is over and economic growth accelerates again. The third explanation relates to AI. AI optimism is driving up shares, as the technology promises significant cost savings and better margins for companies. At the same time, consumers fear rising prices and AI replacing jobs. Although wages have risen in the United States, employees are receiving an increasingly smaller share of the economy's value added, and this decline has sharply accelerated in the 2010s (see figure below). We have rarely seen a situation where consumer confidence and the stock market reflect a similar phenomenon, but from different angles.

US: Labor share of GDP, ratio

Source: FRED