Earnings or Confidence?
Since 1950, the direction of U.S. consumer confidence has historically been every bit as impactful for the stock market as has the direction of Earnings.
As a stock investor, do you prefer to see S&P 500 earning per share (EPS) rise or would you rather see U.S. Main Street confidence increase? Seems like an easy question. Almost all investors would probably choose rising EPS!
Wall Street professionals and the financial media spend voluminous time analyzing potential earnings results either for individual companies or for the overall stock market. And why not? Over time, stock prices follow earnings trends. Historically, however, the stock market has exhibited several periods of prolonged and significant disconnect between stock price performance and earnings trends. In any given year or even over several years, catalysts other than earnings results have become the primary force driving the stock market. My guess is 2026 will turn out to be one of those years.
As demonstrated below, although it receives far less attention, the direction of U.S. consumer confidence has historically been every bit as impactful for the stock market as is the direction of EPS. Regularly, the primary focus is EPS, but perhaps investors should give much more attention, when forming their outlooks and strategies, to Main Street confidence. This has become particularly important in the contemporary period because EPS and confidence have dramatically parted company during the last several years.
Since the pandemic, although S&P 500 EPS have mostly risen, U.S. Main Street confidence has usually declined. For the first time in the current bull market, concerns about the durability and pace of real U.S. economic growth are increasingly outweighing inflation concerns among policy officials. Due to rising growth anxieties, policy officials have embarked on the first broad-based easing cycle of the contemporary bull market. Regardless of whether EPS keep rising next year or perhaps declines mildly due to slower economic growth, for the first time since the 2020-21 bull market, economic policy accommodation should raise Main Street confidence in 2026. Based on history, should Main Street confidence finally improve, the stock market is poised to provide another satisfying result even if S&P 500 EPS prove disappointing. And should both EPS and confidence simultaneously improve, the stock market may deliver some of its best results of the entire bull market.
