In Washington, the President labors, with the characteristic futility of all chief executives, to persuade the public that prices are falling. This is a Sisyphean task. Affordability is the new buzzword that has triggered endless anti-Trump campaign speeches from the Left and a equally robust response from the Right asserting that they are fixing the dumpster fire that the previous administration left behind. A confused consumer class is being convinced of its impoverishment while simultaneously booking Caribbean cruises, jetting to distant locales, and shopping with the vigor of a year round Black Friday 50% off sale. It brings to mind Yogi Berra’s observation that “nobody goes there anymore; it’s too crowded”—except in this case, everyone insists the economy is terrible while standing in line at the airport with their upgraded boarding passes. For the third year in a row, the volume of air travelers has reached new record heights in 2025. This is further good news for Boeing as they continue to ramp up production.
For two centuries, American electoral contests have pivoted on what scholars politely term “pocketbook politics”—the voter’s assessment of their economic circumstances. The current moment offers a particularly rich case study in this perennial disconnect. After nearly five years of above-average inflation and borrowing rates that have indeed frayed the financial fabric of young subprime workers, a curious phenomenon has emerged: consumers report feeling economically besieged while behaving like lottery winners on a spending spree. Consumer spending expectations are growing at a healthy pre-COVID highs of 5%, while anxiety levels are closer to COVID lows than pre-COVID highs.
The explanation for this paradox requires understanding a fundamental truth about human psychology: prices, like entropy, exhibit a persistent upward trajectory. The consumer who paid $6.50 for eggs last Spring and now pays less than $4.00 feels aggrieved, even if their wages have risen 5% while inflation runs at 3%. The absolute price level at the grocery store sears itself into memory with permanence, while the corresponding increase in one’s paycheck dissipates quickly. Those waiting for overall prices to decline are also waiting for a painful economic recession. We are happy to take the win driving to COSTCO with $2.70 a gallon gas to buy a few dozen eggs at 50% off of what they were last March with a paycheck that edges ever higher.
For over 13 years following the mortgage meltdown of 2008, interest rates were artificially suppressed to encourage consumers to borrow at once in a lifetime rates. This monetary policy, executed with all the subtlety of quantitative easing (a euphemism for “printing money”), effectively migrated consumer debt burdens onto the government’s increasingly capacious ledger.
Credit and loan default rates descended to historic lows, creating a synthetic tranquility that lasted until excessive COVID stimulus allowed the inflation genie to escape its bottle in 2021. The subsequent price surge—the highest in 40 years—has sent loan delinquencies rebounding to what casual observers might term “nosebleed levels,” though in reality they merely represent a return to pre-2008 normalcy, before we made a virtue of artificially suppressing the cost of credit. In reality, auto, credit card and home loans are in excellent shape with delinquncy rates at or below any period in the deacdes prior to COVID. Furthermore, banks are easing their lending stadards for loans. This is hardly the time to cut up those credit cards and stuff the stockings with coal.
The young subprime borrower (those with FICO scores below 620) indeed struggle, and their plight merits serious attention. Yet the overall consumer exhibits none of the hallmarks of impending recession. Income and wage growth continue to outpace inflation for the majority—a mathematical reality that somehow fails to penetrate the fog of economic anxiety.
Home affordability remains genuinely terrible, pricing out millennials during their prime years for procreation—a demographic misfortune promulgated by a frozen real estate sector locked into artificially low mortgage rates, reducing mobility. Yet paradoxically, overall home mortgage burdens remain quite low, as existing homeowners joyfully cling to their 2.25 – 3% mortgages like shipwrecked survivors to a life preserver, reluctant to trade up for the current 6.2% national average.
When the 15 year mortgage rate has a four handle, more sellers will provide a sharper rise in the supply of homes available for millenials that are anxious to start a family.
In a classic case of unintended consequences, the government’s effort to shield citizens from the economic consequences of its own lockdown policies produced, with the inexorability of good intentions meeting economic reality, a semi-frozen housing market. Home builders and prospective buyers now navigate this paralysis, while renters pay premium prices for the privilege of remaining outside a market that government largesse has rendered simultaneously overheated and immobile. At least rent is edging lower, closing in on the long term trend line of “normalcy”.
Meanwhile, a new anxiety has emerged: the electricity grid, now struggling to accommodate a sudden demand surge driven by AI data centers, reshoring manufacturing, and electrification. After nearly two decades of demand stagnation, electricity consumption is projected to surge 3% annually—a rate that would have seemed preposterous to grid planners accustomed to decades of flatlined growth. The construction of new high-voltage transmission lines remains hostage to permitting delays that the President has yet to focus upon as much as he has for expediting fossil fuel supplies. This infrastructural lag of corresponding power company investments translate into higher utility costs for blue-collar workers. This is good news for energy companies building their backlog to keep the lights on at the mammoth data centers coming on line later this decade.
The Undeterred Consumer: A Study in Cognitive Dissonance
Here we encounter the central paradox that should fascinate behavioral economists: consumers profess economic pessimism while demonstrating spending patterns that suggest unshakeable confidence. The evidence:
The Travel Boom: Air travel is on track for its third record year, while the cruise industry will surpass its record 2024 results by 8-10%. Wave season bookings—that crucial January-March period when cruise lines fill their manifests—shows demand exceeding supply despite price increases and new ships being added. Passengers are booking earlier and snapping up luxury suites with an alacrity that defies their stated economic anxieties.
Retail Resilience: Reports from the bulwarks of American commerce—Walmart, Best Buy, TJX, Dick’s Sporting Goods—reveal an undeterred shopper. Black Friday gains reported by Mastercard show retail sales up 4.1% and e-commerce surging 10.4% year-over-year. Apparel and jewelry sales advanced 6% and 3% respectively. The Redbook same-store sales report shows a consistent 6% growth rate—a performance maintained for eight consecutive years, interrupted only by the brief COVID shutdown.
Credit Card Companies’ Testimony: The credit card issuers, who take the daily pulse of consumer solvency, consistently report that customers remain financially healthy. As one Mastercard executive noted with admirable restraint: “The consumer is still healthy. We continue to see good spending taking place.”
The Wealth Effect: Household net worth has likely risen between $12 and $15 trillion during 2025, buffering concerns about rising household debt loads estimated to rise $400 to 500 billion this year—a better than 30-to-1 ratio of assets over liabilities that would satisfy even the most conservative banker.
Christmas Shopping: Surveys reveal that shoppers stated they would reduce Holiday giftng in 2025. Yet, Black Friday online sales were up 9.1% vs 2024, a record; Cyber Monday was up 7.1% in 2025, also a record, for a combined $26 billion over this brief period.
This represents cognitive dissonance: consumers simultaneously believe the economy teeters on the brink while behaving as though prosperity were guaranteed by constitutional amendment.
The GDP Renaissance
The underlying economic data confirms what consumer behavior reveals: the economy is exhibiting a dynamism that seemed permanently retired after the Great Recession. The Bureau of Economic Analysis revised Q2’s real GDP growth up to 3.8%, while Q3 is tracking at 3.5%, without any COVID stimulus. Real consumer spending and corporate profits are at record levels. With deregulation and new government stimulus slated for 2026, central bank accommodation continuing, and private infrastructure investment accelerating, and low unemployment, one would assume a more optimistic consumer. Our outlook is for 2.5 to 3% GDP growth in 2026, which is still strong relative to the meager 1 – 2% of the prior decade when optimism was much higher.
The Subprime Exception
Roughly 16% of adults relegated to subprime financial status (FICO scores below 620) genuinely struggle. For these citizens, wage growth has not kept pace with inflation, and the disappearance of COVID-era subsidies—the American Rescue Plan’s healthcare premium assistance and student loan payment pause—creates “headwinds.” The cumulative effect of resumed student loan payments and ceased healthcare subsidies represents a genuine burden for Gen Z and millennials, who now face what one analyst describes as a “completely different type of headwind.” This cohort, heavily targeted by corporate marketing departments, will experience real pressure on discretionary spending. While the majority of labor is unaffected, this represents not mere statistical noise but genuine economic hardship deserving of policy attention. The prosperity experienced by the majority should not blind us to the struggles of the minority. Lifting all boats is a heavy lift as the answer requires either a perpetual growth in the welfare state, or a strong economy with an overdo emphasis on skills centers vs college led by a partnership with big business. For now, falling interest rates and easier bank lending standards will help as we enter the expected growth phase of infrastructure spending in 2026.
After 5 years of debt service forgiveness, sudden sticker shock is stressing marginal debt holders. Yet, rising income has pushed debt burdens back to 15 year lows.
Market Implications: The Coming Rotation
The stock market, that most efficient mechanism for converting expectations into prices, currently trades at elevated valuations justified by anticipated earnings growth. Our conservative forecasts suggest:
- Year-End 2025 EPS: $276, justifying an S&P 500 within a few percentage points of 7,000
- Year-End 2026 EPS: $308, justifying an S&P 500 above 7,400, possibly approaching 8,000
This expected 11% earnings growth acceleration from 2025 to 2026 provides the mathematical foundation for current valuations—a mid-20s price-to-earnings multiple that, while elevated by historical standards, remains rational given anticipated AI-driven productivity gains. Yet the composition of market leadership appears poised for transformation. After three years of dominance by the “Magnificent Seven” technology behemoths—those hyperscalers whose market capitalizations exceed the GDP of many European nations—the anticipated 2026 tax cuts should catalyze a rotation toward smaller enterprises. Small and mid-cap stocks, those laggards of the current bull market, possess the greatest potential for outperformance once the promised tax cuts and deregulation materialize. Equal-weighted S&P 500 stocks, removing the massive gravitational effect of mega-cap technology companies, have significantly underperformed. This divergence cannot persist indefinitely without violating the law of mean reversion—that iron rule of financial markets. Lately the equal weight, small and mid cap stocks have been outperforming into year end and that should continue in 2026. The healthcare sector, led by stalwarts like Eli Lilly and Johnson & Johnson alongside the biotech complex, already show significant momentum. By next summer we expect healthcare (XLV) to heat up further. In the fourth quarter’s sectoral performance, healthcare, consumer discretionary, technology, and consumer staples lead, while materials, real estate, energy, and services languish.
The Risks That Merit Vigilance
Two external risks warrant investor attention as we enter a New Year:
The Supreme Court Tariff Ruling: A January decision on presidential tariff authority could trigger market volatility. Should the Court strike down or severely limit executive tariff powers, the immediate result would be deflationary—a sharp fall in imported goods prices benefiting retailers and consumers while challenging domestic manufacturers who relied on tariff protection. Either outcome—upholding or limiting tariff authority—introduces uncertainty that markets abhor. Yet, setbacks may be breif as the Administration is ready to pounce with alternative constitutional pathways to re-implement these tariffs.
Federal Reserve Timing: Any unexpected delay in anticipated rate cuts for 2026 could serve as catalyst for a market correction that, paradoxically, many sophisticated investors would welcome. A general 10-15% pullback would purge excessive enthusiasm, provide attractive entry points for sidelined capital, and establish a healthier foundation for the secular advance promised by 2026’s tax cuts and infrastructure investments.
The Electrical Grid: Help Is Coming (Eventually)
The electricity crisis represents genuine structural challenge rather than imagined catastrophe. The dramatic shift from two decades of stagnant electricity demand to rapid growth has caught utilities unprepared. The grid now scrambles to meet the triple threat of AI data centers, reshoring manufacturing, and expanding electrification. Yet help approaches, albeit with the speed of a regulatory approval process. Fossil fuel prices have fallen, utilities modernize infrastructure, energy storage capacity expands, and future electric generation ramps up with reduced regulatory delays. These improvements will struggle to benefit consumer monthly expenditures over the next few years absent a recession, but the trajectory points toward resolution while real wages keep the consumer spending spree going. The government’s dual focus must be increasing power generation over the next 5-10 years while maximizing demand for labor and wage growth to bridge the burden of higher consumer prices this decade.
Conclusion: The Triumph of Behavior Over Sentiment
In the final analysis, we find ourselves witnessing a phenomenon where a consumer class that insists upon its economic distress while demonstrating spending patterns consistent with robust prosperity. Their sentiment surveys suggest Depression; their credit card statements suggest the Roaring Twenties. This disconnect carries profound implications for investors. Market participants who base decisions on consumer sentiment surveys rather than actual consumer behavior risk are missing one of history’s great bull markets. The stock market, acting as a rational discounting mechanism, looks past the complaint to the consumption, past the stated anxiety to the actual affluence. The coming year should witness a broadening of market leadership from mega-cap technology to smaller enterprises better positioned to benefit from tax cuts and domestic investment. Financial and industrial sectors are starting to shine. Healthcare, benefiting from demographic tailwinds and pharmaceutical innovation, merits particular attention. The subprime worker’s genuine struggles deserve policy attention but do not portend broader economic collapse. The market, as always, will render its verdict with all the finality of a Supreme Court decision, though with considerably less time for dissenting opinions.