The stock market keeps breaking records, which might seem confusing for consumers who feel the economy is worse than even the depths of the Great Recession.
That seeming mismatch is a glaring one, particularly for those who aren’t invested in the markets and are missing seeing their personal wealth or retirement savings increase. But the stock market’s recent gains are being driven largely by investment in artificial intelligence, according to experts.
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“The stock market is driven by corporate profits more than it’s driven by the economy,” Jeff Buchbinder, chief equity strategist for LPL Financial, told the Washington Examiner.
“So we have an environment now where all of this investment in AI by tech companies is driving huge gains in corporate profits, even while the economy grows at a fairly modest pace, and still, of course, has some headwinds,” Buchbinder added.
And investors are having a pretty good year so far.
The benchmark S&P 500 has risen nearly 11% since the start of 2026 — despite the war in Iran, the departure of Federal Reserve Chairman Jerome Powell, the threat of possibly higher interest rates, and rising inflation. Over the past year, the index has risen more than 28%.
The tech-heavy Nasdaq has been even more of a cash cow. It has risen more than 16% since January alone and posted very solid 40% gains over the past year.
Jamie Cox, managing partner for Harris Financial Group, told the Washington Examiner that he gets asked questions about why the stock market is performing so well despite weaker spots in the macro economy.
Cox said people assume these things happen in a vacuum — but insisted that the stock market can still boom despite other economic conditions, such as higher inflation.
“The two can coexist, right? You can have both a massive productivity-enhancing technology wave happening at the same time that there is a temporary rise in inflation,” Cox said.
He also predicted that the AI boom is about 80% responsible for recent gains in the market.
And inflation has been on the rise.
Inflation in the personal consumption expenditures price index, the most closely tracked gauge, rose to 3.8% in April, well above the Fed’s 2% target and much higher than just a few months ago before the war with Iran sent energy prices spiking.
CPI inflation had fallen to as low as 2.4% in January before the war began, so headline inflation has vaulted more than a full percentage point — something that comes at a time when consumers were already complaining about cost-of-living concerns.
Discontent with economy is broad and deep
And on top of the higher inflation, consumers are more generally reporting dissatisfaction with the state of the economy.
Consumer sentiment fell to 44.8, down from 49.8 in April, according to a preliminary reading of the University of Michigan Consumer Sentiment Index for May, dropping lower than it did during the worst of the Great Recession and when the entire country was locked down during the COVID-19 pandemic.
Consumer sentiment is now down 10% from a month ago and more than 14% from a year ago. That marked the third straight month of falling consumer sentiment.
“The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month,” said Joanne Hsu, the survey director.
The sentiment readings show that optimism about AI and bullishness on Wall Street are not showing up in how people are feeling on Main Street.
“The stock market record highs are having no effect whatsoever on cheering consumers up, which means most Americans have the money locked up in 401(k) retirement accounts that cannot be drawn on to make life easier now,” said Chris Rupkey, chief economist at FWDBONDS.
Ryan Young, a senior economist at the Competitive Enterprise Institute, said consumer sentiment is pessimistically biased and not necessarily always tied to economic stagnation.
“And I think the fact that it’s cratered to record lows is more an indicator of how people feel about politics rather than about their personal financial conditions,” he told the Washington Examiner.
And despite the gains in the stock market, Young said the U.S. equities market underperformed foreign markets last year.
“So the U.S. did well, but in relative terms, we’re actually falling behind international markets,” Young said. “We had a 16% return; international markets had a 29% return, so the U.S. could and should have had an even better year.”
Many say, though, that the AI boom in the markets has some more room to run. Cox emphasized just how much investment has flowed through the space recently, noting that spending is twice that of the Manhattan Project.
“It’s such a big deal, and people can comprehend it kind of, but the numbers are so big that it’s really easy to overlook it or not believe it,” Cox said.
And while the stock market continues to gain, there are political implications at play.
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It’s an election year, and Republicans are fighting to retain control of both the House of Representatives and the Senate. And the positives for incumbents resulting from a booming stock market might be outstripped by the negatives of too-high inflation — something that hurt 2024 Democratic presidential nominee Kamala Harris’s campaign.
“I think people are going to be more focused on inflation, on their budgetary constraints, the level of stress that they may have financially,” Kates said, although he added that some cohorts, such as older people who are more heavily invested, could be feeling wealthier from the stock gains.
Zach Halaschak (@zhalaschak) is the economics reporter for the Washington Examiner.