Market Warnings

1. Household Enthusiasm is Waning?

Since at least 1980, the S&P 500 index has typically performed well when U.S. household enthusiasm was improving. Chart 1 overlays the S&P 500 stock price index (blue line, left log scale) with a measure of household enthusiasm (red line, right log scale). The proxy for household enthusiasm is a ratio of the real wage rate divided by the unemployment rate. As demonstrated, as long as household real purchasing power (i.e., the real wage) rises faster than the unemployment rate, the stock market has typically provided solid investment results. But when households become dissatisfied, the stock market often suffers.

Enthusiasm began weakening in late-2023 without much reaction from the stock market. However, since late-2025, the proxy has been improving because the unemployment rate declined slightly, and since June, the real wage rate has again been rising due to a temporary decline in oil prices. That is, since late last year, both a decline in the unemployment rate and a recovery in the real wage rate has helped support stock prices. The question is whether this support will persist.

Despite a stronger employment report last Friday, my guess is the jobs market will remain relatively disappointing during the balance of this year as the negative impact of higher oil prices, higher yields, a flatter yield curve, and sluggish monetary growth keep the pace of job creation sluggish. In addition, although the real wage rate got some reprieve as oil prices recently rolled over, they have since again rallied to new highs for this crisis likely renewing downside pressure on the real wage rate. Consequently, household enthusiasm seems poised to worsen again during the balance of this year likely bringing renewed selling to the stock market.

2. Health Care Stocks Remain Under Pressure!

The real price of Prescription Drugs keeps declining, recently at an alarmingly aggressive pace, which should keep health care stocks underperforming (chart 2). For one of the rare times during the contemporary bull market, after a relatively stable period for real drug prices during 2025, health care stocks have been outperforming. However, given the recent renewed collapse in real drug prices since early this year, health care stocks may again lag the overall stock market during the balance of this year.

3. Has Capital Spending Been TOO STRONG?

Since late last year, U.S. capital spending – tied mostly to ballooning AI excitement – has surged across many sectors of the U.S. economy. As shown in chart 3, this is particularly true in the services sector. Chart 3 overlays the ISM employment subindex (red line) with the new orders subindex (blue line). Historically, within the services sector, mostly when capital spending rises (i.e., the new orders subindex rises), employment in the services sectors also rises. For example, this happened from 2002 to 2005, 2009 to 2012, and again between about 2016 to 2019. Usually, periods of greater capital spending stimulate employment gains.

However, a few times since 1999, and again most recently, the services sector has enjoyed a surge in capital spending “without” any meaningful gain in employment. And when this has happened, the U.S. stock market has struggled. For example, from 1999 to 2001 (i.e., near the top of the dotcom stock market in 2000), new orders in the services sector rose significantly without raising service sector employment. The same divergence between new orders and employment occurred again in 2021 – just before the S&P 500 stock market suffered a bear market in 2022. Most recently, service sector new orders have again surged higher – much like they did in 2000 and again in 2021 – without any meaningful improvement in services sector employment. As it has in the past, is this signaling another forthcoming difficult period for U.S. stocks?

Normally, capital spending is good for the overall economy and for future job prospects. Sometimes, though, capital spending cycles become too extreme as companies chase “fool’s gold” which never materializes. If capital spending does not improve future economic success – i.e., overall demand, employment, and profits – then it often simply becomes a busted bubble. Similar to 2000 and in again in 2021, has the contemporary capital spending boom turned into a “gold rush” and become too extreme? Is the U.S. services sector indicating another potential bust?

4. Credit Risks Rising?

Major technology companies are increasingly using the corporate bond market to finance their artificial intelligence capital spending boom, and this massive wave of supply is starting to widen credit spreads and push up borrowing costs. For the past decade, big tech companies mostly funded data centers and infrastructure out of their massive operating cash flows. But that self-funded era is ending as capital expenditures soar. Instead, companies are choosing to tap credit markets to spread out multi-year infrastructure costs and preserve cash, and this has led to a rise in credit risks.

As demonstrated in chart 4, since at least 2010, increases in the Caa corporate yield spread have generally caused turbulence within the S&P 500 stock price index. Several episodes are highlighted during the last 16 years — including two bear markets in 2020 and again in 2022 — which were associated with meaningful spikes in credit spreads. Just since early February, the Caa spread has widened from about 5.6% to 8.7%, but so far, the stock market has not flinched. Increasingly, the contemporary AI-driven economic surge has the markings of an old debt-laden economic boom-bust cycle where credit spreads eventually spike and a bust emerges. How long will the stock market ignore the current ongoing and persistent surge in credit spreads before adjusting?

5. Stocks Outpacing Bonds by the LARGEST Amount in 100 Years!

As shown in chart 5, during the last 76 months, the U.S. stock market has outperformed U.S. bonds by an almost 28% average annualized pace – the biggest outperformance of stocks above bonds in 100 years! During the last six and one-third years, the bond market has suffered its largest “decline” of the last century falling by slightly more than 6% annualized while the stock market has risen by slightly more than 20%! This is only the second time in the last 100 years that bonds have suffered a decline over a 76-month period, and the current 6% decline is nearly three times larger than the previous decline back in the late-1960s.

While such a dramatic outperformance by stocks above bonds doesn’t mean the stock market is necessarily destined for a decline, it has often preceded periods when the stock market significantly underperformed the bond market. For example, the stock market struggled from 1939 to WWII, during the 1970s, and after 1999 to the mid-2000s. In addition, the stock market essentially only matched bond market results during the 1980s. Like other traditional valuation metrics surrounding today’s stock market, the contemporary multi-year, record-setting outperformance of stocks compared to bonds is yet another warning sign for stock investors. Could long-term Treasury bonds surprisingly provide competitive returns with stocks during the next few years?

6. “Total” Real U.S. Investment Spending Per Job has been Flatlining?

Although new-era investment spending per job – driven primarily by AI excitement – has been explosive in the last few years, “total” real U.S. investment spending per employee has been trending largely sideways. Chart 6 overlays the S&P 500 Stock Price Index with the level of “total” real U.S. investment per job since 1960. The correlation between the logs of these two quarterly series has been a surprisingly strong 0.97 since 1960. That is, the U.S. stock market has been persistently aided by a labor force adequately equipped with the latest and greatest capital tools.

Most recently, the focus has been on the explosion in U.S. new-era investments. However, as highlighted by the black dotted oval in chart 6, “total” real U.S. investment spending per job has not been that aggressive during the last five years and particularly since 2024. Maybe old-era investments simply don’t matter as much anymore for the stock market? Or perhaps, like it has in the past, a lack of “total” investment per job during the last couple years may soon start pressuring the overall stock market?

7. Ultimately, its Profit per job - not Investment per job which matters MOST!

Total real investment spending per job may have slowed in recent years, but, as demonstrated in chart 7, real profit per job has nonetheless remained explosive! Chart 7 shows a strong relationship between the S&P 500 Stock Price Index and real corporate profit per job since 1990. Similar to the late-1990s, persistently strong gains in real profits per job has kept the stock market climbing during the last few years. Will the recent explosive rise in real profits per job continue?

Chart 8 overlays the annual growth in real U.S. profit per job with the 10s to 2s U.S. yield curve since 1976. Note that movements in the yield curve (shown in red) are leading or pushed forward by 4-quarters. Since 1976, with a 1-year lead, the yield curve has done a pretty good job of forecasting the “directional” move in real profit per job growth in the ensuing year. During the last four quarters, the U.S. yield curve has flattened suggesting that real profit growth per job is likely to moderate during the coming year. Indeed, although the yield curve has improved from a deep inversion in recent quarters, it remains at a relatively “flat slope” compared to history, and thus still primarily represents a restrictive force. Combined with the recent overall surge in long-term bond yields, a relatively modest growth in the real money supply, a continued strong U.S. dollar, higher inflation caused by rising oil prices, and aggressive contemporary future EPS estimates, it would not be surprising to see real profit results start to disappoint in the coming quarters.

Final Comments

None of these indicators definitively indicate the stock market is headed for a fall. But they are a good reminder that the stock market continues to face significant challenges as it hangs near all-time record highs. Some caution is probably warranted.

Thanks for Taking a Peek! Jimp

Disclosures

Please note that stocks are inherently risky. Any stock can lose most of its value at any moment, including any stock I mention here. You should never rely on a single source for investment decisions, including me. I am a retired investment strategist offering opinions and observations on the markets, the economy and companies. You should do your own research and also consult a qualified financial planner and investment advisor before making investment decisions.

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