The feeling you get when you walk into a grocery store in almost any mid-size American city is familiar by now: prices that haven’t gone back to their previous levels, a silent reevaluation of what you keep and what you put back on the shelf, and an overall perception that prices have increased and that this has been the case long enough to cease being shocking.
The S&P 500 is close to record highs when you launch a brokerage app. The value of Nvidia surpasses that of the whole German stock market. The Nasdaq has increased. These two events are occurring concurrently, and one of the key economic tensions of the present is the difference between what families are experiencing and what markets are pricing.
The term “vibepression” has been used by economists and market watchers to characterize the situation, which is not technically a recession but rather a chronic state in which consumer sentiment consistently falls short of what the headline indicators would indicate. For a considerable amount of time, the University of Michigan’s consumer confidence surveys have remained well below pre-pandemic levels.
Even when official growth figures indicate that the economy is doing well, people don’t feel that way. The market, on the other hand, pricing in a future that is significantly more hopeful than the one that the majority of households are already living in. The reason for this discrepancy is not especially difficult to pinpoint; it’s just awkward to state outright.
A few very large corporations are driving the headline performance of the S&P 500. Although the precise makeup varies slightly from quarter to quarter, the dynamic remains constant: Nvidia, Microsoft, Alphabet, Meta, and Apple. These businesses have produced real earnings growth, mostly due to AI-related expenditure by governments and corporations constructing data center infrastructure at a rate that has maintained high chip demand and rising cloud revenue.
That expansion is genuine. The issue is that it is so concentrated that the overall index presents a somewhat false image of the state of American corporations. The market appears far less spectacular when the mega-caps are removed. The headline figure does not accurately reflect the median stock’s performance.
Beneath all of this is the division between labor and capital. Productivity advances, pricing power, and cost discipline—including, in many industries, staff reduction—have all contributed to an increase in corporate profit margins. Shareholders receive such margin gains. They haven’t resulted in widespread wage rise that would have significantly changed consumer confidence.
Watching this unfold gives the impression that the wage economy is moving at a slower pace while the market is operating as an effective means of allocating rewards to capital. Although this division is not new—it existed before the AI era—it has gotten wider than it has in most other historical eras.
It’s not too difficult to describe the risk inherent in the current configuration. At a scale that necessitates the technology fulfilling its commercial potential in a short amount of time, markets are pricing in aggressive future earnings from AI. A long-term valuation tool that accounts for earnings cycles, the Shiller CAPE ratio is currently close to levels last observed in the late 1990s. Whether AI earnings will emerge quickly enough and at a large enough scale to support the valuations based on them is still up for debate.
The mean reversion from current levels might be severe if they don’t—that is, if the capital spending cycle yields disappointing returns or if a significant participant modifies its AI investment plans. This disparity between market confidence and economic reality would not be the first to swiftly and cruelly close. According to historical precedence, those gaps typically don’t eventually close.
