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Is Weak Consumer Sentiment a Contrarian Signal?

April 16, 2025

Time to Read: 2 minutes

The University of Michigan Consumer Sentiment Index, a widely followed measure of how consumers perceive the current and future state of the economy, recently fell for the fourth straight month to its lowest reading since mid-2022. Uncertainty surrounding trade policy, as well as rising concerns over inflation and slowing growth has weighed on sentiment the past few months.

What does weak sentiment mean for markets? Confidence readings can serve as a contrarian indicator when it comes to forward equity returns. In fact, equities have historically delivered strong returns in the one-year period following depressed sentiment levels, with the S&P 500 delivering average returns of 19% in the 12-months following the low in sentiment.

However, the latest reading was conducted prior to President Trump’s 90-day pause on reciprocal tariffs. While the pause has reduced the risk of recession, we do expect weakened sentiment to spill over into lower growth and will likely keep markets on edge in the near term. We expect equity market volatility to persist until the administration provides more clarity on the individual country negotiated tariffs.

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Are Earnings Broadening Beyond the Mag-7?

Tech stocks have outperformed the rest of the S&P 500 for several years, and while we expect earnings growth among these companies to continue in 2026, we see another encouraging trend emerging. Earnings across the rest of the market are on an upward path too — and are set to contribute more to earnings growth for the S&P 500 Index in 2026 than the Magnificent 7.

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Positive Signals from Industrial Production?

Industrial production is a proxy for the level of manufacturing in the economy, and last week’s report showed the highest growth rate in three years.

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Healthy Correction?

After climbing 17% year to date through late October, the S&P 500 declined 5% through November 20. We believe the market was due for a healthy correction. While further downside is possible, it would not concern us.

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The Global Economy Is Holding Up

This past year was rife with risks to the global economy: policy changes, tariff uncertainty and more. Yet, the global economy held up as manufacturing and services activity strengthened across the world.

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