The S&P 500 (^GSPC +0.37%) has advanced 9% year to date despite dropping sharply in March when the U.S.-Iran conflict pushed oil prices to a multiyear high. But the rebound may have been premature.
Oil prices remain well above where they started the year, geopolitical tensions remain elevated in the Middle East, and investors just got bad news about President Donald Trump’s economy: Consumer sentiment dropped to an all-time low in May after wholesale inflation reached a multiyear high in April.
Here are the important details.
Image source: Official White House Photo by Joyce N. Boghosian.
Consumer sentiment just dropped to its lowest level in history
The University of Michigan publishes the Index of Consumer Sentiment (ICS) each month. The ICS is based on a 50-question survey that covers three broad areas: personal finances, business conditions, and buying conditions. The questions are designed to provide insight into how consumers feel about the economy today and what they expect in the future.
The ICS measured 44.8 in May 2026, marking the third straight monthly decline. More alarmingly, the latest reading is the lowest score in history (i.e., since data collection started in November 1952). Comments from the latest survey suggest consumers are gloomy not only because high prices are diminishing their buying power but also because they expect inflation to worsen in the next year.
Importantly, while consumer sentiment scores themselves have no direct impact on the economy, they can act as leading indicators. Weak sentiment can evolve into weak spending, and that would be bad news for the stock market because consumer spending accounts for about 70% of gross domestic product (GDP), which makes it the primary driver of economic growth.
Tina Fong at Schroeders Wealth Management explains, “When an economy is performing well, consumers spend more and business activity increases. As a result, corporate profit margins improve, leading to higher earnings growth.”
Logically, weak consumer sentiment could bring about the opposite outcome. Economic growth could slow as consumer spending and business activity diminish, leading to weaker corporate earnings growth. In turn, that could put downward pressure on the stock market because equities are often valued based on corporate earnings.
Wholesale inflation just hit its highest level since 2022
The Producer Price Index (PPI) measures how prices change for goods and services at the producer level. It is often called wholesale inflation, and it differs from the Consumer Price Index (CPI), which tracks the prices of goods and services at the consumer level. Changes in PPI inflation often foreshadow changes in CPI inflation because producers (e.g., farmers, manufacturers, and wholesalers) often pass price increases to consumers, at least to some degree.
PPI inflation hit 6% in April 2026, the highest reading since 6.4% in December 2022. High energy prices tied to the Iran conflict were the primary culprit. But elevated energy prices are now spreading through the economy via higher transportation and warehousing costs. Core PPI (which excludes food and energy prices) hit 5.2% in April 2026, the highest level since 5.7% in December 2022.
Here’s the big picture: CPI inflation accelerated in March and April, and the latest PPI data suggests consumer inflation will worsen further in the months ahead as producers pass along higher prices. That is bad news for the stock market because high inflation comes with a long list of negative consequences, including higher interest rates and reduced consumption.
Companies are apt to grow more slowly if interest rates rise and consumer spending stalls, and as I’ve already mentioned, slower earnings growth could put downward pressure on stock prices. That is especially true in the current market environment because valuations are elevated. The S&P 500 trades at 21.1 times forward earnings, a premium to the 10-year average of 18.9 times forward earnings.
Consider this: The consensus estimate says S&P 500 earnings will increase 22% this year. The efficient market hypothesis says investors have factored that information into the S&P 500’s current valuation. But if Wall Street analysts cut earnings forecasts due to high inflation and weak sentiment, stock prices would almost certainly fall as investors consider that new information. Keep that in mind as you make trades in the current environment.
