Consumer vs. CEO Confidence: One Economy, Two Views

The same market environment often looks different, depending on whom you ask. This year, “confidence” sits at its highest level since the Conference Board first started surveying chief executives in 1976. Consumer confidence, on the other hand, seems to have stalled, with the University of Michigan’s consumer sentiment index falling slightly from April to May. 

On the surface, it isn’t hard to see why CEOs feel optimistic. First-quarter earnings growth for S&P 500 companies averaged more than 50%. Profit margins have risen and, due largely to faster-than-expected reopening, corporate leaders have expressed strong forward outlooks. Coming off such an encouraging first quarter, and despite some investor complacency creeping in, the near future could be bright for spending, both in terms of capital expenditures and research and development.   

Consumers also have plenty of reasons for optimism, given improving job and wage prospects and the U.S. personal savings rate hovering close to 15%. In 2019, that rate averaged 7.7%. So, why aren’t they more confident? We see two main reasons:

• Concerns over inflation and supply-chain disruptions: May 2021 University of Michigan data show that consumers expect average price increases of 4.6% over the coming year. Consumers may also still worry about the availability of durable goods, given production bottlenecks related to supply-chain problems.

• Negative psychology tied to the potential end to pandemic-related stimulus payments: The unpredictable nature of stimulus payments has driven greater-than-usual fluctuations in real personal income and made consumer expenditures less stable.

To be sure, consumer confidence and spending habits can change quickly. As investors calibrate risks, they should factor in the possibility of shifting consumer sentiment and its potential impact on the economy and markets.

Keep in mind that, unless consumer spending is as robust as many CEOs now anticipate, their business expansion plans could prove destructive. Notably, while U.S. consumption has resumed its pre-pandemic pace, it hasn’t exceeded that level, despite the extensive stimulus. With growth in disposable income and savings now fading back to trend, the U.S. economy may be missing an opportunity.

Alternatively, a rise in consumer optimism and spending could raise the risk of economic overheating, accompanied by higher inflation. 

Investors can make some portfolio adjustments to help protect from these risks. In addition to monitoring consumer confidence data, often a leading indicator of consumption trends, careful stock selection will be key, with an eye toward balancing the quality of a company’s earnings and profit achievability while avoiding excessively high valuations, as reflected in stock prices. Investors should also consider allocations to both consumer-oriented stocks and equities likely to benefit from an anticipated climb in capital expenditures.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 7, 2021, “Confidence Crosscurrents.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report.