Stock Market vs Consumer Spending Disconnect: Analysis of Market-Economy Divergence

This analysis is based on a Reddit discussion from November 7, 2025, questioning the apparent disconnect between strong stock market performance and declining consumer spending behavior amid widespread layoffs [1].

The stock market has shown resilience despite concerning economic fundamentals. Major U.S. indices posted gains over the past 30 days, with the S&P 500 up +1.01%, NASDAQ +1.77%, and Dow Jones +1.47% [0]. However, this performance masks significant structural concerns. Apollo’s chief economist Torsten Sløk warns that the S&P 500 is at “historically extreme valuations” when measured by traditional metrics like the Warren Buffett indicator and Shiller CAPE ratio [2].

The market experienced recent volatility, with the S&P 500 dropping 1.6% in early November as weak jobs data and high valuations triggered investor reassessment [2]. Multiple Wall Street leaders, including CEOs of Morgan Stanley and Goldman Sachs, foresee potential 20% market corrections over the next two years [2].

The real economy shows starkly different trends. 2025 has been the worst year for job cuts since 2009, with U.S. companies announcing 1,099,500 job cuts in the first ten months - a 44% increase compared to all of 2024 [3]. October 2025 alone saw 153,074 job cuts, marking a 183% increase from September and the highest October for job cuts in 22 years [3].

Consumer sentiment has deteriorated significantly, with the University of Michigan’s Survey of Consumers falling to 53.6 in October, down from 70.5 a year ago [1]. This aligns with the Reddit poster’s observations about reduced tipping and discretionary spending.

The divergence stems from fundamental differences between market composition and the broader economy:

• The U.S. economy runs primarily on services (about two-thirds of household spending), while the S&P 500 is weighted toward goods and platform businesses, with technology alone making up roughly 36% of the index [1]
• The S&P 500 generates about 28-30% of its sales overseas (55% in the tech sector), making it less dependent on domestic consumer spending than the broader economy [1]
• Since 2000, S&P 500 earnings per share are up about 356%, with total returns up roughly 632%, while nominal GDP has grown only around 200% [1]

The current market rally is heavily concentrated in AI-related investments, creating potential bubble dynamics:

• Massive capital expenditure on AI infrastructure is pumping valuations and driving the U.S. economy, raising questions about whether the technology can deliver on its promises [2]
• Morgan Stanley’s chief investment officer Lisa Shalett estimates only a 50/50 chance that the AI capex boom will deliver as modeled, noting implementation may take longer than hoped [2]
• Less than 10% of companies say AI is actually embedded in their services and products today, suggesting current valuations may be premature [2]

The economy is experiencing a K-shaped recovery where different segments move in opposite directions. High-income consumers and investors continue to benefit from market gains and corporate profits, while lower and middle-income workers face job insecurity and reduced discretionary income.

• Valuation Risk
  : The Warren Buffett indicator (market cap to GDP) has surged above 200%, suggesting market prices are far ahead of economic fundamentals [2]
• AI Investment Risk
  : If AI investments fail to deliver expected productivity gains, a significant market correction could occur
• Consumer Demand Risk
  : Continued job losses could eventually impact corporate earnings through reduced consumer demand
• Concentration Risk
  : Technology’s dominance in market indices creates a winner-take-all dynamic that disconnects from broader economic performance

• Corporate profit margins have remained strong, with goods industry margins about 60% higher today than in 2018-2019, supporting stock prices even as wage growth slows [1]
• International revenue exposure helps U.S. multinationals maintain growth even when domestic demand weakens
• Stock buybacks and capital allocation strategies support per-share earnings growth even in challenging economic conditions

The analysis reveals that the apparent disconnect between stock market performance and consumer spending is structurally driven rather than anomalous. The market’s heavy weighting toward technology companies with significant international revenue exposure, combined with an AI investment boom, has created a divergence from domestic economic conditions.

While the S&P 500 shows resilience, the underlying economy faces significant pressure from widespread job cuts and deteriorating consumer sentiment. The market’s concentration in a few large-cap winners - with the “average company” (Value Line Geometric Index) up just 47% since 2000 compared to the S&P 500’s 632% total return - highlights the fragility of current market dynamics [1].

The analysis suggests that current market valuations may be unsustainable without corresponding improvements in the real economy, particularly if AI investments fail to deliver expected productivity gains or if job losses continue to impact consumer demand.