The Great Disconnect Widens Amidst Hawkish Fed Talk

By the Curmudgeon with Victor Sperandeo

Introduction:

The huge divergence between U.S. macroeconomic fundamentals and equity valuations widened this past week, characterized by tremendous speculation in the technology sector tied to AI and weak economic reports. This market exuberance persists despite months of softening economic data and the prospect of a hawkish Federal Reserve rate hike later this year. It’s an unprecedented disconnect!

The tech-led momentum drove major benchmarks to fresh record highs, with the Nasdaq 100 and the S&P 500 closing out a ninth consecutive winning week. The S&P 500 closed at a record 7,580.06 on Friday, 11.0% above its 200-day moving average.

This week’s lopsided, "bad breadth" [1.] rally was hyper-concentrated in generative AI infrastructure.

Note 1. InvesTech's proprietary A/D Divergence Index (shown in this post) has been declining since the start of the super strong stock market rally that started in April. This market breadth indicator tracks how many individual stocks are participating in a stock market rally or decline, versus where the S&P 500 is actually trading at. It measures where the S&P 500 Index should hypothetically be trading for given the trend in breadth, versus where the Index is actually trading (adjusting for the effects of decimalization). Because the A/D Divergence Index measures the broader market's underlying strength rather than a few cap-weighted tech giants, its continued downward trend confirms that internal market health is deteriorating.

……………………………………………………………………………………………………………………………………………………….

Here are a few of the explosive, earnings-driven single-day tech stock gains this past week:

· Dell Technologies (DELL) vaulted 32.8% on Friday in its best session on record, fueled by a 757% year-over-year surge in AI server revenue.

· Super Micro Computer (SMCI) advanced 11.6% alongside hardware peers.

· Hewlett Packard Enterprise (HPE) climbed 12.6% on broadening data center demand.

· Microsoft (MSFT) gained 5.4% to heavily anchor the S&P 500's technology sector advance.

Consumer Sentiment Falls to Extreme Record Low:

The University of Michigan Index of Consumer Sentiment fell to an unprecedented 44.8 in the final May 2026 reading, driven by significant declines in both the Current Conditions and Future Expectations sub-indexes. This marks the first time all three metrics have reached concurrent record lows since November 1953, reflecting a historic downturn in consumer confidence. With nearly 75 years of historical data, it is truly unprecedented for consumer attitudes to be so dismal.

Historically, drops in this sentiment index serve as severe warning signs of economic distress and an impending recession. The Consumer Sentiment Index has dipped during every major economic crisis, but it has never dropped this low—even during periods of massive unemployment or systemic financial collapse.

In November 2008, at the height of the “Great Recession,” this sentiment index hit a low of 55.3. The May 2026 level was over 10 points LOWER! That’s despite the September 2008 Lehman Brothers bankruptcy, severe job losses and an unprecedented housing market collapse.

The charts below depict three consumer sentiment indexes from 1965 to date with shaded areas denoting recessions.

Other Macro-Economic Reports Released Last Week:

· The Conference Board’s Consumer Confidence index, released on May 26^th, ticked down from 93.8 to 93.1 as consumers grappled with surging inflation. Over 60% of respondents noted that they are buying fewer items in response to rising prices while 50% said they are delaying purchases of expensive items. Note that consumer spending accounts for 67.7% of GDP, according to the latest data.

· New Home Sales fell -6.2% on a month-over-month basis as they remain in the narrow range of the last few years. The level of inventory rose +1.7% and now represents a 9.4-month supply at the current sales rate – well above the balanced level of 4-to-6 months. This is an important sign that more inventory alone will not fix this stagnant housing market as affordability concerns remain the biggest problem.

· The Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge, confirmed inflation is reheating as the 12-month rate rose from 3.5% to 3.8% - the highest level in three years. The Core PCE, which removes the volatile food and energy components, inched up to 3.3%, from 3.2%. This is well above the Fed’s target of 2% and shows that price pressures are broad and not just the result of higher oil prices.

· American’s personal saving rate fell to 2.6% in April, according to the Commerce Department — down from 5.5% a year prior and the lowest since June 2022. Disposable personal income —personal income less personal current taxes—decreased $19.9 billion (0.1%), and personal consumption expenditures increased $111.1 billion (0.5%). Clearly, consumers are being squeezed by higher prices and a very sluggish economy (outside of big tech/AI companies).

Hawkish Fed Talk:

Federal Reserve officials maintained a hawkish tone on Friday, signaling that further monetary tightening remains on the table if escalating Middle East conflicts trigger a persistent inflationary shock. This potential policy shift has gained traction with Fed Vice Chair for Supervision Michelle Bowman, historically one of the central bank's more dovish policymakers. Speaking at a conference in Iceland, Bowman acknowledged that geopolitical instability and subsequent energy supply disruptions could fundamentally alter her interest rate outlook, reinforcing the risk of an extended restrictive policy cycle. "It still seems early to assess the size and persistence of the economic effects from the Iran conflict," she said, adding, however, that "should disruptions persist well into the second half of the year, we could start to see broader effects on inflation."

Fed governor Lisa Cook said in a speech that she’s closely watching the risk that companies could embed higher energy prices into the prices they set while workers incorporate them into the wages they negotiate. “Inflation is clearly moving in the wrong direction,” Cook said. However, she noted that inflation has been pushed higher by shocks that should, “in theory, be temporary and short-lived.” Nonetheless, Cook said she’s “prepared to raise rates” if inflation doesn’t fall in a “timely manner,” but her baseline is that inflation will fall back without the Fed having to raise rates.

Minneapolis Fed president Neel Kashkari also sounded cautious about inflationary forces, saying Wednesday that the Fed needs to contain inflationary risks that look to be rising, though it’s too soon to say whether that would require a rate hike.

Financial markets are betting the Fed's next move will be to raise its benchmark interest rate from the current 3.50%-3.75% range, likely by year's end. The CME Fed Watch Tool now shows a 48% probability of a 25 bps to 75 bps rate hike at the end of the December 2026 FOMC meeting.

Victor on Inflation and Fed Rate Hikes:

These words of the great philosopher Confucius (551 BCE-479 BCE) are very profound and embody wisdom in every word:

“If language is not correct, then what is said is not what is meant; if what is said is not what is meant, then what must be done remains undone; if this remains undone, morals and art will deteriorate; if justice goes astray, the people will stand about in helpless confusion. Hence there must be no arbitrariness in what is said. This matters above everything.”

Fast forward to today. In a quasi-free economy like the U.S. prices fluctuate all the time – it’s the very nature of capitalism. Many economists try to define inflation using more popularized terms.

· Michael Howell of CrossBorder Capital is the very best at measuring liquidity. He calls price increases related to non-monetary factors as “High Street Inflation.”

· Others refer to such price increases as “Main Street Inflation” - a colloquial phrase to describe the real-world inflation experienced by everyday consumers and small businesses.

Milton Friedman said it best (emphasis added), “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

Anything else is free market price movements caused by supply - demand dynamics of shortages and surpluses. While the current oil shortage has and will continue to cause price increases, it is only temporary. When the shortage ends, prices will decline.

Monetary stimulated inflation causes a permanent price rise. Prices do not decline, only continue to grow at different rates.

Therefore, any of the Keynesian Fed members who think “raising rates” will do anything to curb price increases, will be proven horribly wrong. Instead, rate hikes could cause a major recession, especially with consumer sentiment so horrible.

Victor’s Market Outlook:

U.S. stocks will decline materially by sometime in July, especially the semiconductors and MAGNIFICENT 7 names. As oil inventories run down, spot crude will trade up to $150+ (eclipsing the WTI crude oil all-time high of $147.27 per barrel, which was set on July 11, 2008).

Thereby, consumers will virtually stop spending for anything other than necessities. Corporate earnings and stocks will then begin a meaningful decline. In my view, it is too late to change this inevitability.

Ironically, only in Wall Street does a “shocking event” like the Iran conflict, which the U.S. government started but can’t seem to fix, cause one of the strongest stock rallies in history? I believe that U.S. government surreptitiously buying stock index futures is a major reason for this rally.

President Trump and Congress will likely take the blame for the downfall to come due to the negative effects of the prolonged war with Iran.

End Quote:

The “why” of the new all-time lows in the Consumer Sentiment numbers is best described by the late singer Jimmy Cliff who is second to Bob Marley in the REGGAE music genre. In his famous song “No Justice” his lyrics explain the sentiment numbers:

I work all day
To find my daily bread
Work so hard to get
A roof over my head
But the one's I work with
Acts like they're my masters
When what I produce I'm
More then equal partner

I can't get no justice
Under this system
I can't get no justice
In this society

I work day and night to
Find my daily needs
But freedom is suppressed by
Another one's greed
Why should certain ones
Control another one's needs?
It's rebellion
These kind of action breeds.

…………………………………………………………………………………………………………………….

Stay healthy. Wishing you success and good luck. Till next time………………..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).