Expectations are Falling and the Stock Market is Volatile. That’s Bullish.
Consumer sentiment is in decline, inflation expectations are rising, small business confidence is sagging, and recession calls are growing. In the short term, this swirling uncertainty has almost certainly been the driver of market volatility. But in the long term, I think it could be bullish.
First, allow me to frame the various—and quite widespread—declines in sentiment and growth expectations.
Let’s start with the most critical component of the U.S. economy, the consumer. In March 2025, U.S. consumer sentiment experienced a significant decline of -11%, reaching its lowest point in nearly two and a half years. The University of Michigan’s Consumer Sentiment Index dropped to 57.9 from February’s 64.7, which was well below expectations and was accompanied by a sharp increase in long-term inflation expectations (see chart below).1
University of Michigan: Inflation Expectations
I do not make specific stock recommendations in this column, but I’ve also observed some consumer warning signs from CEOs of consumer-facing companies. The CEO of Delta Airlines, Ed Bastian, said there was “something going on with economic sentiment, something going on with consumer confidence.” And Walmart CEO Doug McMillion echoed those concerns, stating that shoppers appear to be budget pressured, adding that he’s noticed certain “stress behaviors [that Walmart] worries about.”
Small businesses have also been feeling a bit uneasy. In March 2025, small business uncertainty in the United States surged to its second-highest level since 1973, reflecting growing apprehension among entrepreneurs about the economic outlook. Related, the National Federation of Independent Business (NFIB) reported a significant decline in its Small Business Optimism Index, dropping 2.1 points to 100.7 in February. These shifts indicate that small business owners are increasingly cautious, potentially scaling back expansion plans and bracing for potential economic challenges ahead.
Finally, there has been a pronounced increase in the mention of ‘recession’ online and in the press. Over the past month or so, recession talk has seen a three-fold increase in the media, and searches for “recession” on Google saw a sharp spike.
I want to be careful not to frame these sentiment indicators and fears of recession as overblown concerns. There is fundamental data that supports some caution, and tariff uncertainty could ultimately steer inflation and growth in the wrong direction. It is also fair to say that sagging sentiment and rising inflation expectations can become a self-fulfilling prophecy, as wary consumers opt to save, and businesses hit the pause button on investment and hiring plans.
What we also have here, however, is a rapidly growing “wall of worry,” which stocks love to climb over time.
Long-time readers of my columns have seen me make this argument before, whether in the context of earnings expectations or recession fears. As consensus starts to tilt negative and expectations fall, the bar gets lowered for the economy and U.S. corporations to ‘over-deliver.’ A clear example comes from 2022—Google searches for “recession” spiked then as well, with a majority of economists expecting economic contraction. The recession never came, and the stock market posted exceptional years in 2023 and 2024. As investors and consumers grow more worried and skeptical in the current environment, I see a bigger opening for ‘better-than-expected’ outcomes down the road.
Bottom Line for Investors
It is clear that consumer sentiment, small business confidence, and recession fears are all moving in a negative direction. These concerns may be warranted, and tariff policy could escalate in a way that works against positive trends in growth and inflation. But history also reminds us that markets can thrive—on a forward-looking basis—when expectations are falling. While policy uncertainty remains a concern, the downstream effect has also created a significant “wall of worry” that lowers the bar for positive surprises. Consumers and businesses may be more adaptable than they’re currently getting credit for, and tariff policy may not be as broad and punitive as many fear. Investors should remember that when pessimism dominates, even modestly positive economic developments can fuel market rebounds.
Disclosure
2 Fred Economic Data. February 21, 2025. https://fred.stlouisfed.org/series/MICH#
3 Google Trends. 2025.
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