Earnings, Not Feelings
Third Quarter 2026
“You’ve got all these feelings. The stock doesn’t know you own it. The stock just sits there; it doesn’t care what you paid or the fact that you own it. Any feeling I have about the market is not reciprocated. I mean, it is the ultimate cold shoulder we are talking about here.” – Warren Buffett
The second quarter of 2026 ended with at least modestly promising news on several fronts. Equity markets closed the quarter near record highs, driven largely by technology and semiconductor stocks benefiting from AI-driven earnings optimism. With active negotiations to end the Iran conflict moving forward, one of the major threats to the global economy seems to have been neutralized for the time being.
The Fed held rates unchanged recently but signaled growing support for hikes later in the year, with roughly half of the committee members now penciling in at least one increase. This would be a hawkish pivot under new Chairman Kevin Warsh, and the 10-year Treasury yield continued to move higher as the year has progressed in response to expectations of future rate increases.
Feelings vs. Numbers – a Paradox
However, underneath these higher yields and higher stock prices we see consumer feelings that don’t align from a historical point of view. There is currently a paradox; broad consumer sentiment readings are low, but equity markets are high. The S&P is hitting new peaks, driven by strong corporate earnings and sustained AI investment. Meanwhile, the University of Michigan Consumer Sentiment Index sits at 49.5—near record lows, with recent declines spanning all age groups. Two data points moving in opposite directions.
How to reconcile this contradiction? Let’s start with the famous saying “Don’t listen to what people say; watch what they do.” While consumers may report they are concerned and/or worried about their economic situation, large U.S. banks and credit card processors have pointed out that consumer spending remained robust through the first months of 2026.
“K-Shaped” Sentiment
Beneath the headline sentiment number lies a significant divide: the income-tier breakdown of the Michigan survey. Over the twelve months ending May 2026, sentiment among the top third of income earners was essentially flat, holding its ground despite tariff uncertainty, elevated rates, and a volatile equity market. For the bottom third, the experience was categorically different: sentiment fell over 25% during the same period, a decline of a magnitude typically associated with recession or acute financial crisis. The headline index (an average across all three groups) obscures both realities. It registers as “low” without conveying that for a significant portion of the population, confidence hasn’t merely softened, it has collapsed, while another significant portion saw effectively no change. This matters because the top third of income earners drive a far larger share of consumer spending than the bottom third. The top 20% alone account for over 60% of overall consumer spending, according to Moody’s Analytics. This segment of the population also has the majority of stock market ownership, and enthusiastic behavior on their part could continue driving persistent speculation in bullish markets.
The initial public offering of SpaceX in June is a good example of this. It instantly became one of the five largest companies in the world by market capitalization, with an extremely high valuation due to massive investor demand. For some perspective, if it traded with a 50x price-to-earnings ratio (very high), it would need to earn roughly $50 billion in earnings to support the price it closed at on the first day of trading. The company made $18 billion in revenue over the past year, without a profit. Needless to say, the bar is sky high for the stock.
Earnings Matter
Coming back down to earth (pun intended), what tends to drive stocks higher over the long term is the earnings growth that those companies produce—and produce they did in the first quarter of 2026. Through the first three months of the year, S&P 500 company earnings came in with an aggregate growth rate of over 25% year over year. Even excluding spurious one-time gains from mega-cap tech companies, corporate earnings were still up over 12%. What’s more, 84% of companies beat their earnings estimates during this period, an exceptionally high number.
Making Sense of it All
Given the mix of facts we are faced with, it’s possible to justify rather different takeaways.
The Optimist’s Read: Earnings are real, the consumer at the top of the K is still spending, and sentiment is just that—feelings, not hard numbers.
The Pessimist’s Read: Rising stress below the surface with a K-shaped economy, and a stock market index that increasingly measures AI sentiment more than economic health spell market performance that cannot last long.
At Mitchell Sinkler & Starr, we continue to focus on news and updates that affect companies our clients hold and their current and future earnings power. Client portfolios can always be adjusted based on individual risk tolerance, but we urge our clients to keep their long-term focus and not to be guided by near-term “sentiment” whenever possible.
– Mitchell Sinkler & Starr’s Portfolio Managers
Bubble Watch Update
Below is an update of the “bubble watch” table we have been tracking. The SpaceX IPO looks like it will not affect the S&P 500 Index for at least a year, as S&P has a profitability requirement before joining the index, regardless of the size of the company. This is part of the reason Tesla took so long to be included in the index.
Nasdaq, Russell, and others do not have this specific requirement, and many have decided to include the company in their indexes, albeit at a small size, within the first month of trading.
Valuations meanwhile look similar to how they did to start the year. Higher than average, but not at tech bubble extremes. However, the semiconductor and tech rally in the first six months of the year continues to push the technology sector to an ever higher overall weighting in the index.
Economic and Capital Markets Data
