Companies are cashing in on consumers' unwillingness to bargain shop 💸
Plus a charted review of the macro crosscurrents 🔀
Sentiment surveys confirm that consumers are very aware of rising prices, and they are complaining about them. People hate inflation.
Interestingly, inflation hasn’t really stopped people from spending. Economic data confirm this.
This contradiction helps explain why, despite poor vibes, the economy continues to grow, profit margins continue to expand, and corporate earnings continue to rise.
A recent research note from Goldman Sachs highlights studies reflecting these trends.
First, they cite two studies (this and this) that provide evidence companies have been increasing price markups on the stuff they sell. This evidence is in line with data showing gross profit margins have been expanding.
“After-tax corporate profits as a share of value added have roughly doubled from about 5% in the late 1980s to over 10% recently,” Goldman economists wrote. “Over the same period, U.S. firms have substantially raised markups — the amount by which prices exceed the marginal cost of producing goods and services.”
At least some of this trend toward rising markups over the years can be explained by falling costs. Regardless, the point is that what customers are paying increasingly covers much more than the costs.
But why hasn’t there been more pushback from consumers?
As I’ve been arguing for a while, customers will pay up if they can afford it.
On that, the Goldman economists found studies showing consumers’ sensitivity to price has been on the decline (study), a trend that can be explained by rising incomes (study).
“Higher income raises the opportunity cost of time, leading consumers to search less for lower prices,” Goldman economists wrote.
Of course, this also means wealthier folks are less price sensitive than poorer folks.
“[Economist Kunal Sangani] estimates that increases in average income and in income inequality — which has meant that less price-sensitive households account for a larger share of total consumption — can account for a roughly 8pp rise in the aggregate retail markup from 1980 to 2018,” Goldman economists added.
This speaks to the K-shaped economic narrative, which argues that higher-income cohorts have increasingly driven spending while those on the lower end retrench.
For those familiar with the concept of price elasticity of demand, this discussion isn’t exactly mind-blowing. Nevertheless, it’s a timely one as everyone wrestles with why corporate profit margins remain high despite consumers’ distaste for higher prices.
Take off your sentiment hat🧢 and put on your stock market hat🎩
As a consumer, I don’t like any of this. I’d much rather be a beneficiary of any corporate cost savings. But instead, the opposite appears to be happening.
Admittedly, I’m not helping the problem. Like the people in Sangani’s study, I frequently find myself begrudgingly paying up for stuff when I could be trading down to lower-priced alternatives.
As an investor in the stock market, I suppose I’m willing to tolerate all this as long as it’s driving sustainable earnings growth, which is bullish for the stocks in my portfolio.
This dynamic speaks to the internal conflicts we face living in a world where how you feel and how you’re treated might not align with the overall direction of the economy or the markets.
There are times when you are wearing your sentiment hat. And there might be times you’re motivated to put on your policy hat.
But TKer is a stock market newsletter, which means we’re putting on our stock market hat right now. And the evidence continues to show that publicly traded companies, which are not charities, remain effective at maneuvering in ways that grow earnings and improve shareholder value.
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Related from TKer:
Higher energy costs, massive labor costs ... and yet record-high profit margins? 🤑
Globalization has been great for U.S. corporate profit margins 🌎
Income and costs affect you and your neighbors differently 💵
4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃
Review of the macro crosscurrents 🔀
📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,620.90 and a closing high of 7,609.78 on Tuesday. The index closed the week at 7,383.74, up 7.9% year-to-date. For market insights, check out the Stock Market tab at TKer. »
There were several notable data points and macroeconomic developments since our last review:
💼 Jobs were created. According to the BLS’s Employment Situation report released on Friday, U.S. employers added 172,000 jobs in May. The three-month moving average has risen to 188,000, the highest level since early 2024.
Total payroll employment rose to a record 159.0 million jobs in May.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — stood at 4.3% in May.
The labor market is in decent shape, but clearly isn’t as hot as it was just a few years ago.
For more on the labor market, read: Things are looking up in the labor market👍
💸 Wage growth is cooling. Average hourly earnings rose by 0.3% month-over-month in May. On a year-over-year basis, May’s wages were up 3.4%.
💰 Job switchers get better pay. According to ADP, annual pay in May for people who changed jobs was up 6.5% from a year ago. For those who stayed at their job, pay was up 4.4%, about what it’s been for the past year.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 Job openings rose. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 7.62 million job openings in April, up from 6.89 million in March.
During the month, there were 7.37 million unemployed people — meaning there were 1.03 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.69 million people in April. While challenging for the people affected, this figure represents just 1.1% of total employment. This metric remains slightly below prepandemic levels.
For more on layoffs, read: Mathematical context can totally change the story 🧮
Hiring activity remains well above layoff activity. During the month, employers hired 5.12 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — is relatively low, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In April, 2.98 million workers quit their jobs. This represents 1.9% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.
For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 225,000 during the week ending May 30, up from 212,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked down to 1.777 million during the week ending May 23.
For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾
💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 0.3% in the first quarter of 2026 … as output increased 1.0% and hours worked increased 0.7%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.8% in the first quarter of 2026, reflecting an increase in output of 3.2% and increase in hours worked of 0.4%.”
For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰
💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 5.2% y/y in the week ending May 30, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 4.1% y/y. Dept stores, general merch and restaurants saw the biggest pickup in y/y spending growth. The largest declines in y/y spending growth were in furniture, transit, home improvement, clothing, electronics & groceries.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
⛽️ Gas and diesel prices fall but remain elevated. From AAA: “The national average for a gallon of regular gasoline is down 12 cents from last week at $4.42. Crude oil prices have been going down this week amid reports of peace talks with Iran. But the fragile situation could cause oil prices to spike again if a ceasefire deal isn’t reached. The chart below shows how the national average has fluctuated in recent weeks. Gas prices remain the highest they’ve been in four years and will likely remain elevated as the busy summer driving season gets underway.“
Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.
For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊
🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.48%, down from 6.53% last week. From Freddie Mac: “With mortgage rates in the mid-6% range and income growth outpacing home price growth, housing affordability is marginally improving.“
As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🔨 Construction spending ticked higher. Construction spending increased 0.4% to an annual rate of $2.17 trillion in April.
📋 Manufacturing activity surveys signal growth, but also problems. From S&P Global’s May U.S. Manufacturing PMI: “At first glance, the manufacturing sector seems to be firing on all cylinders but lift the hood and the picture is not so clear. The headline PMI has hit a four-year high, with strong factory production growth for a second successive month in response to a further marked upturn in order books, but since the outbreak of war in the Middle East we have seen production and demand buoyed by stock building as companies worry over rising prices and supply difficulties. This stockpiling was again widely evident in May and makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course. The incidence of supply chain delays is the highest since August 2022, with the buying of safety stocks not only adding to the supply squeeze from the closure of the Strait of Hormuz but also pushing prices higher for a wide variety of inputs. The resulting steep jump in producer costs sends a worrying signal that broader economy inflation has further to rise in the coming months.”
Similarly, the ISM May Manufacturing PMI signaled growth.
The ISM report also signaled inflation was heating up.
📋 Services activity surveys were mixed. From S&P Global’s May U.S. Services PMI: “Demand for services has been largely stalled over the past three months, losing the strength seen earlier in the year. The sluggish services economy is acting as drag on overall economic growth, which the PMI data signal to be running at a modest annualized pace of just above 1% so far in the second quarter. … Rising costs and cooling demand are meanwhile causing service companies to cut staff at the fastest rate seen since the early months of the pandemic.”
While S&P’s survey signaled cooling growth, ISM’s Services PMI signaled an acceleration in growth.
The ISM report also signaled inflation was heating up.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃
🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.0% to $82.5 billion in April.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road.
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.0% rate in Q2.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Putting it all together 📋
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been trending higher.
Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation, while positive, is not as hot as it used to be. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐
…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
Warren Buffett’s ‘fourth law of motion’ 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Proof that ‘past performance is no guarantee of future results’ 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.
It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
