Wall Street Is Not Main Street
- David Wrigley, CFA®, CAIA®
- 3 days ago
- 8 min read
Overview:
Major global equity indices keep notching fresh highs. Following a brief geopolitical wobble in March, the S&P 500 just recorded its eighth consecutive weekly gain, marking only the fourth time this has happened in two decades. Better than expected earnings growth is responsible for much of the recent gains. Tech titans, the AI supercycle, and record profit margins are doing the heavy lifting. The market is euphoric but remarkably narrow.
And yet, smart investors everywhere are asking a version of the same question: “How can stocks be at all-time highs when the economy feels like it's bad and getting worse?” Inflation has run hot for five straight years. Borrowing costs just jumped. Energy prices are still up 40-50% from pre-Iran conflict levels despite the recent pullback. Job creation has been lackluster, and workers worry about AI taking their jobs. All this stands in stark contrast from the market’s enthusiasm.
Both pictures are real. They just describe different parts of the economy and represent different timeframes. Wall Street is not Main Street, and Main Street is not Wall Street. This gap has widened as tectonic shifts reshape the economy. The risk is behavioral. At peak economic anxiety, investors may abandon their long-term financial plan. Others may sit in cash and wait for the "all-clear" signal (that never arrives), forfeiting returns.
Diversify’s Take:
The Main Street Picture:
Despite the ongoing global energy supply shock, 2026 U.S. real GDP will still likely settle in the +2.0% range. However, for a meaningful slice of America, that resilient economic picture feels disconnected from daily life. Households say they’ve never been more downbeat. As shown below by Goldman Sachs, the University of Michigan consumer sentiment index just notched a record low.¹
Three pain points are dominating Main Street.
Persistent Inflation: The high cost of living is the source of much of the household gloom. Inflation has now been above the Federal Reserve’s (Fed) 2.0% target for 60 consecutive months. And it's moving away from that target, not toward it. In April, the headline CPI was 3.8% (vs. 3.3% in March), and core CPI was 2.8% (vs. 2.6% in March). We expect the May data in a couple weeks to be worse.
Energy prices are a big part of the recent story. With the Strait of Hormuz still effectively closed, the supply shock risks bleeding into a broader swath of goods and services. We're watching that transmission mechanism closely. Housing costs have also stayed elevated, and core services inflation is stubbornly high. Higher inflation has pushed interest rates up, making borrowing more expensive. The average new 30-year fixed mortgage now stands at 6.60%, its highest level since last August. The affordability crisis is moving to center stage ahead of fall's midterm elections. Those concerns are likely to dominate voter sentiment.
K-Shaped Economy: The wealthiest 10% of households now account for roughly half of all U.S. consumer spending, the highest share on record. Wage growth in the top quartile sits above its 10-year average, while wage growth in the bottom quartile is near the 10-year low. Lower-income households also face structurally higher inflation because rent, food, gasoline, and electricity carry more weight in their consumption basket. Those costs are tangible, they’re recurring, and they're felt immediately.
From a balance sheet perspective, the “wealth effect” is dramatically different across income cohorts. The "upper k" own more assets and have watched the value of their home and brokerage accounts surge over the last few years. Though less impactful, net borrowers want short-term rates to fall, while net savers are earning 3.0-3.5% on their money market reserves.
Shifting Labor Market: We've recently written about how corporate profits and GDP could begin to diverge from the labor market as AI-fueled productivity takes hold. Companies are doing more with less, so hiring has slowed across most major economies. The labor market isn't collapsing, it’s just not generating jobs at the pace consumers, voters, and new graduates expect. The 4.3% unemployment rate is relatively low, but it likely masks building anxiety as some white-collar workers question whether their roles survive in an AI world. The good news: companies aren't shedding workers either. Initial jobless claims remain near 2-year lows.
As we move toward artificial general intelligence (AGI), the labor market will be complex and uneven. But with a longer-term lens, technological waves have always left civilization better off in aggregate. An RBC Global Asset Management analysis found that average hours worked per person in the U.S. have fallen roughly 40% over the last 150 years, a logical result of each tool’s efficiency gains. Over that same stretch, per capita incomes exploded higher and unemployment rates remained low on average. AI will likely bring rolling, industry-by-industry waves of layoffs and retooling. But it could play out similar to history: higher incomes, contained unemployment, and perhaps even a step toward the 4-day workweek some parts of the world already practice.
The Wall Street Picture:
Wall Street has shrugged off those economic concerns. Major equity indices are now up 5-10% YTD. This highlights the forward-looking nature of stocks. While consumers respond to present-day realities like grocery bills, gas prices, and the stability of their jobs, equity investors price in anticipated earnings growth. And the market is concluding those earnings will stay strong for at least several more quarters. We just wrapped the best U.S. earnings season in over five years. Q1 earnings growth exploded +27% year-over-year, nearly double original analyst expectations. This marked the sixth straight quarter of double-digit earnings growth.
The same AI force pressuring Main Street's labor market is fueling those profits. AI infrastructure beneficiaries have driven most of the recent upward revisions. Over the last twelve months, 2026 hyperscaler capex expectations have jumped from +8% to +64%. A recent Natixis analysis showed tech capex has added an average of 90bps to quarterly real GDP growth over the last five quarters, eclipsing the late-1990s buildout. But most of that spend isn't reaching Main Street since datacenters are capital intensive, not labor intensive. This means money is flowing from business to business rather than business to employees. Productivity gains are landing straight in corporate operating profits, boosting the S&P 500 profit margin to a record 15% in Q1.
The recent market strength is masking a more muted return picture beneath the surface. Following two quarters of broadening that rewarded diversification (Q4 2025 and Q1 2026), the AI-only trade has come roaring back. Heisenberg Report showed that through mid-May, 84% of the S&P 500's YTD gains came from just 10 stocks. A recent Citadel piece noted that only 22% of S&P 500 names outperformed the index over the prior month. That is a 30-year low. This is the narrowest, most concentrated market since the late 1990s. The divergence runs two layers deep. The stock market has split from the economy, and the market has split from itself.
Investment Implications:
Fixed Income:
The inflation squeeze has lifted the entire yield curve about 60bps since March, putting modest pressure on bond prices. The broad U.S. bond market is roughly flat YTD. The 10-year Treasury yield sits just below 4.50% and the 30-year is at 5.00%, both psychologically important levels.
The Fed is stuck. The FOMC has held rates steady for three straight meetings, with three dissents in April, the most in years. Dissent signals growing uncertainty about the rate path ahead. And that was before new Chair Kevin Warsh took the reins. As we've been messaging, the rates market is now pricing the Fed to be on hold through year-end, with a potential hike in March 2027.
This higher-for-longer regime offers the most attractive real yields in nearly two decades. We maintain a short duration posture across most fixed income segments and stay focused on high credit quality. And with rate volatility likely to persist, we remain strong advocates for direct bond ownership over co-mingled bond funds.
Equity:
After Q1’s brief correction, the U.S. market is now back to 21x forward earnings. As previously mentioned, the market is historically concentrated, and the factor scoreboard shows it. Momentum and high-beta indices have trounced equal-weight, quality, and low-volatility YTD. When the market narrows to a handful of names, the disciplined investor gets left behind.
The market’s narrowness makes us uneasy, despite the positive fundamental story. Earnings have broadened, but price action has not. This is a difficult environment for fundamental investors who maintain a valuation discipline and quality focus. Investors should be intentional about how much of the market's concentration they desire and balance the rest with diversifying segments like small and mid cap, international, and value.
Our view is that AI benefits will head downstream to the broader economy, and other sectors and segments will participate. We continue to own high-quality, competitively advantaged businesses with real pricing power. In a world where inflation is a key risk, that pricing power is the single best protection a portfolio can hold.
Alternative Investments:
We continue to find compelling opportunities in private markets for clients who can bear the inherent illiquidity. Private real estate valuations appear to have troughed in mid-2025, and the supply/demand picture for the multi-family and industrial sectors has improved. In private equity, this is the "year of the IPO," a reminder of how much value now accrues to private shareholders. In prior decades, companies went public much earlier and at much lower valuations than today. Infrastructure and private equity secondaries also appear attractive.
Private credit is the segment drawing headlines, and most of them are not flattering. The sector is working through a redemption challenge as the stated liquidity of many fund wrappers is incongruent with investors’ redemption requests. We'd separate the structure’s restrictive features from the strength of underling loans. Fundamentals remain intact, and with base rates unlikely to drift lower any time soon, private credit could continue to produce high single-digit yields. Structured notes may deserve a closer look here for the right portfolios. They can be designed to offer equity diversification with built-in downside protection features, both of which matter in this market environment.
Summary:
Wall Street and Main Street have always been related but distinct. The market discounts the future; households live the present. The two run on different timelines and respond to different pressures, and right now they are unusually far apart.
The real risk here isn't the economy, it's behavioral. When the economy feels broken and the market keeps printing new highs, investors brace for a reckoning. They sit in cash. They wait for the all-clear that never sounds. The cost of mistaking how Main Street feels for how Wall Street should be priced could be measured in quarters or years of foregone compounding.
Our base case is that eventually, the gap will narrow from both sides: earnings broaden, prices follow, and the bounty of AI eventually reaches the broader economy. Overall, we remain optimistic about what lies ahead for the financial markets and economy. However, we also acknowledge the risks on the horizon, including midterm election dynamics, narrow equity market leadership, and elevated equity valuations.
We remain diversified, disciplined, and committed to helping you stay focused on your tailored plan through volatile and uncertain markets and economic conditions. As always, we appreciate your trust and partnership.
David Wrigley
Chief Investment Officer
Goldman Sachs Global Investment Research, as of May 22, 2026
The information contained herein is the opinion of the author as of the date the market update was written and is subject to change without notice as markets change, and new information is available. While Diversify utilizes sources deemed to be reliable, we have not independently verified the content. Investors should carefully consider any changes based on this market commentary and discuss their individual circumstances with their trusted advisors. Past performance is not indicative of future results. This communication is for informational purposes only and should not be construed as investment advice or a recommendation.
