When Confidence Crashes, Opportunity Rises

• November consumer sentiment approached a record low.

• Similar outcomes have precipitated stock market rallies.

• The S&P 500 has averaged a 47% return over the next two years.

When sentiment hits the floor, smart money starts climbing the stairs…

The last couple of months have tested investors’ patience, and their stomachs. Every day, the headlines seem to offer a fresh reason for stocks to fall. In early October, it was China’s refusal to ink a trade deal with the U.S. By month’s end, the two sides had agreed to ease tensions for the next year. So much for that narrative.

Then came the late October Fed meeting. The media drumbeat warned that rate cuts were off the table. But when the dust settled, the Fed had trimmed rates again. Still, the same tired warnings are already making the rounds ahead of the next policy decision in December. It’s a pattern we’ve seen before: fear sells, and the loudest voices tend to be the most bearish. But more often than not, they miss the turn.

Case in point: last week’s release of the University of Michigan’s preliminary consumer sentiment index for November. The gauge dropped to one of the lowest levels on record. The media framed it as a red flag for the economy. But history tells a different story—one that’s far more bullish for investors.

When the University of Michigan’s Consumer Sentiment Index hits extreme lows, it often marks a turning point—not for Main Street, but for Wall Street. Deep pessimism tends to show up when fear is peaking and expectations are washed out. That’s not the start of a collapse, it’s usually the end of one. These moments reflect emotional capitulation. And in a market driven by expectations, that shift in mood can be the spark that lights the next rally.

I’ve run the numbers. And based on what I found, troughs in consumer sentiment have consistently set the stage for strong gains in the S&P 500 and Nasdaq Composite.

But don’t take my word for it, let’s look at what the data’s telling us…

The University of Michigan’s Consumer Sentiment Index has been tracking the mood of American households for nearly 75 years. Born in the aftermath of World War II, it was built to measure how people feel about their finances, the economy, and what’s ahead. Since the early 1950s, it’s offered a steady read on consumer confidence through every kind of market cycle.

Each month, researchers at Michigan’s Institute for Social Research survey at least 500 adults across the U.S. They ask questions like: How’s your financial situation? Is now a good time to buy big-ticket items? What do you expect over the next year? The answers are distilled into three key measures: current conditions, future expectations, and the headline sentiment index. The data is weighted to reflect the broader population and benchmarked to a 1966 base year, making long-term comparisons easy.

Because consumer spending drives about two-thirds of the U.S. economy, the index gets a lot of attention. When sentiment rises, people tend to spend more. When it falls, they pull back. That makes it a useful gauge for policymakers, businesses, and investors alike. It doesn’t predict the economic future, but it does capture the public’s pulse.

Now, when the index makes headlines, it’s usually because it’s hit an extreme. The media uses it to argue that the economy is either about to boom or bust. I look at it differently. I see those extremes as contrarian signals. If the gauge is making a new high, how much better can things get? If it’s plumbing new lows, how much worse can it really be?

From an investing standpoint, I focus on the pessimism. Because when sentiment is in the gutter, the spending mood is more likely to improve than deteriorate. And that shift tends to drive demand—for goods, services, and stocks.

So, I went back and found every major trough in the Michigan sentiment index since 1952. Then I ran the total returns (with dividends reinvested) for the S&P 500 and Nasdaq Composite based on the closing price at the end of each month when a low occurred. The results were striking.

Let’s start with the S&P 500…

Following major sentiment lows, the index has averaged gains of 29% over the next 12 months and 47% over the next 24 months. That’s well above the long-term annual average of 9.5% since 1928. And in every one of those long-term cases, the market finished higher.

The Nasdaq’s record is even stronger…

While the index hasn’t been around as long, the data still packs a punch. After major sentiment troughs, the Nasdaq has averaged gains of 41% and 53% over the following one- and two-year periods, respectively. That compares to its lifetime annual average of 11%. And like the S&P, every one of those instances delivered a positive return.

So, like I said at the start: the headlines may be loud, but the data speaks louder. When consumer sentiment hits bottom, it’s often a setup, not for more pain, but for a steady rally. The market doesn’t wait for everyone to feel good. It moves when expectations are at their worst. And right now, that may be exactly what’s happening.

Five Stories Moving the Market:

Applied Materials said it expects spending on chipmaking equipment in China to fall in 2026 as tighter U.S. export controls limit its market access; overall revenue is projected to be stronger in the second half of fiscal year 2026 – Reuters. (Why you should care – management forecast first quarter revenue of $6.85 billion compared to the consensus expectation of $6.76 billion)

Japan’s economy likely shrank by 2.4% during the third quarter, the most in two years; the release early next week is poised to offer Prime Minister Sanae Takaichi potential justification for compiling a hefty economic package – Bloomberg. (Why you should care – a diminished outlook for Bank of Japan rate hikes is likely to boost renewed interest for borrowing in yen to invest in risk assets like stocks)

Artificial intelligence fueled a stronger-than-expected earnings season for Japan’s tech sector, with surging data-center demand prompting chipmakers and equipment suppliers to raise forecasts – Bloomberg. (Why you should care – semiconductor companies with AI-driven demand are seeing rising profits, while suppliers to the automotive industry continue to struggle)

Federal Reserve Bank of Minneapolis President Neel Kashkari said he did not support the Fed's interest-rate cut in October given the economy's resilience and said he was undecided on what to do for the Fed's meeting next month – Reuters. (Why you should care – Kashkari, a non-voter this year, said he could make the case for easing or cutting depending on the economic data)

Verizon Communications is planning to cut roughly 15,000 jobs, looking to reduce costs as it contends with increased competition for both wireless service and home internet customers; the cuts, the largest ever for the carrier, are set to take place in the next week – WSJ. (Why you should care – this comes after Amazon recently announced a large round of layoffs, likely increasing pressure on our central bank to support economic growth)

Economic Calendar:

China – House Prices, Fixed Asset Investment for October

China – Industrial Production, Retail Sales for October

Eurozone – European Union Economic Forecasts (5:00 a.m.)

Eurozone – GDP for 3Q (5:00 a.m.)

Eurozone – Reserve Assets for October (6:00 a.m.)

Fed’s Bostic (Atlanta, Non-voter) Speaks (9:20 a.m.)

Fed’s Schmid (Kansas City, Voter) Speaks (10:05 a.m.)

U.S. - Baker Hughes Rig Count (1:00 p.m.)

Fed Logan (Dallas, Non-voter) Speaks (2:30 p.m.)

Fed’s Bostic (Atlanta, Non-voter) Speaks (3:20 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)