Record profit margins are carrying the S&P 500 to new highs. But the people who actually buy things are pulling back, and the gap between corporate performance and consumer confidence is now the widest it has been this cycle.
FactSet data recently published shows the S&P 500's blended net profit margin running at 16.9% for the second quarter. That is the highest level since FactSet began tracking the metric in 2009. It is up from 14.8% in the first quarter and 12.9% a year ago, and it sits well above the five-year average of 12.4%. Alphabet and Amazon are the largest contributors, but even excluding both, the index-wide margin comes in at 15%, also a record. Analysts now project full-year earnings growth of 30% for 2026 and the forward price-to-earnings ratio has actually compressed slightly from 20.4x at the end of June to 20.0x today.
The market hit 7,800 for the first time on Thursday before easing on Friday. Three consecutive weekly gains, a 14% year-to-date return, and a third-quarter earnings outlook that keeps getting revised upward. By the numbers, this is a healthy market.
#Consumer Sentiment Drops as Retail Sales Miss
The other side of the ledger looks different. The University of Michigan's preliminary August consumer sentiment index dropped 8% to 51, ending two consecutive months of improvement and badly missing the 55.0 consensus estimate. Expected business conditions fell 11% for the short run and 17% for the long run. Older consumers, lower-income households, and those without a college degree showed the sharpest declines. Republicans posted the steepest monthly drop, with their outlook now 19% below readings from just before the Iran conflict.
The same day, the Census Bureau reported that retail sales fell 0.6% in July. That was the steepest monthly decline in more than a year and well below the 0.1% gain analysts expected. Even excluding gas stations and auto dealers, sales fell 0.3%. Control group sales, the category that feeds into GDP calculations, dropped 0.4%. Some of the weakness is timing. Amazon shifted Prime Day from July to June this year, pulling forward online spending. But the pattern is broader. Only 8% of consumers expect their income to outpace inflation over the next year, according to the Michigan survey.
#Energy Remains the Market's Swing Factor
Energy prices sit at the center of this divergence. The Iran war and the ongoing disruption to the Strait of Hormuz have kept crude elevated, with Brent trading above $88 per barrel. The IEA's August Oil Market Report, released on August 12, slashed its supply forecast again. Global oil supply is now expected to decline 4.3 million barrels per day in 2026, with 8.3 million barrels per day of Gulf production still shut in. The IEA projects a deficit of 1.8 million barrels per day in the third quarter, more than double its July estimate.
For the S&P 500's energy sector, this has been a windfall. Energy is up 38% year to date, the top-performing sector by a wide margin. But for consumers, elevated gasoline prices remain a direct headwind. The July CPI showed headline inflation at 3.4% year-over-year, and while core CPI eased to 2.5%, energy costs are still 14.7% above year-ago levels. Gasoline is up 24.6% over the same period.
Core inflation is within reach of the Fed's 2% target. The problem is that the energy component is not under the Fed's control. It is a function of geography and geopolitics, not monetary policy. Markets now price a 67% probability that the Fed holds rates in September. The 10-year Treasury yield sits at 4.69%, up 35 basis points from a year ago.
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#AI Capex Keeps Rising, but Credit Markets Are Priced for Perfection
The other structural force propping up earnings and market breadth is the hyperscaler capex cycle. After Q2 2026 earnings, combined capital expenditure guidance from Microsoft, Alphabet, Amazon, and Meta now sits at approximately $725 billion for 2026, up from $413 billion in 2025. That number has been revised upward every quarter. Most of the spending is directed at AI infrastructure, data centers, and custom silicon. It is flowing through to semiconductor revenues, industrial suppliers, and power infrastructure companies.
Yet the credit market is not pricing any stress. The ICE BofA High Yield Index option-adjusted spread sits at roughly 281 basis points, in the richest decile of its history against a long-run median of about 450 basis points. Investment-grade spreads trade at 81 basis points. This is a market that expects continued growth with no disruption.
The AAII Investor Sentiment Survey, however, shows individual investors are not buying the optimism. Bearish sentiment has been above its historical average for 27 consecutive weeks. Bullish sentiment is below average for the fourth straight week. As a contrarian indicator, that persistent skepticism has historically been a tailwind for equities. But it also means that the next negative catalyst could trigger a sharper move than current positioning suggests.
#What the Margin Divergence Means for Retail Investors
The counterargument to the bearish consumer read is straightforward: companies are still delivering. Margins are expanding. Earnings growth is accelerating. Valuations are not extreme by historical standards. As long as those trends hold, the market has a fundamental floor.
The risk is that the consumer eventually catches up with the data. Real wage growth has turned negative. Retail sales are contracting. Sentiment is deteriorating across age groups, income brackets, and political affiliations. Consumer spending accounts for roughly two-thirds of US GDP. If spending continues to slow into the third quarter, earnings estimates will need to adjust.
For now, record margins and persistent bearish sentiment form a combination that typically favors equities over the medium term. But the widening gap between corporate performance and consumer health is worth monitoring closely. When sentiment and spending data align this poorly with record earnings, the market tends to resolve the contradiction in one direction or the other. Investors who understand which side of that gap they are positioned on will be better prepared for what comes next.