The S&P 500 has notched back-to-back years of 20% plus returns, trouncing the average 10% annual return over the past thirty years.
However, anyone who has followed the markets for long enough knows that good times can beget bad times (and vice versa), and average returns only tell part of the story. Over the last three decades, there have been plenty of hair-pulling moments and lost sleep.
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Just ask long-time Wall Street analyst Stephen Guilfoyle.
Guilfoyle's career stretches back to 1987 on the New York Stock Exchange floor. Undeniably, 1987 caused many sleepless nights. He also survived the Internet bust, the Great Recession, the Covid meltdown, and 2022's inflation-caused bear market.
Yes, he's seen a thing or two.
The good news is that the economy is still doing well. The bad news is that there's reason to wonder if that trend will continue.
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Consumers are stretched, inflation picked up recently, and support from Fed monetary policy is waning.
Those points aren't lost on Guilfoyle, who recently pointed out a huge risk to the economy and stocks flying under the radar.
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Stock surge thanks to AI and interest rate cuts
Covid caused GDP to shrink by about 28% in the second quarter of 2020, prompting massive government spending, including stimulus checks. Those efforts worked, allowing the economy (and stocks) to recover quickly. However, they also fueled runaway inflation, which was worsened by supply chain disruptions caused partly by the Ever Given crash that blocked the Suez Canal.
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To rein in inflation, Fed chair Jerome Powell embarked on the most hawkish interest rate policy since Volcker broke the back of inflation in the early 1980s. That plan worked, given that inflation has retreated substantially from its peak above 8% in the summer of 2022.
With inflation retreating, investors and business leaders began modeling for eventual interest rate cuts, lifting business spending and stock prices ahead of the first Fed rate cut last September.
Stocks have also ridden a tsunami of interest in artificial intelligence.
After OpenAI's ChatGPT became the fastest app to reach one million users, businesses began reshaping IT budgets to invest in training and operating large language models and agentic AI programs that can assist and sometimes replace workers.
The spending surge began in 2023 and took off in 2024.
The biggest cloud data businesses, hyperscalers, include Amazon's AWS, Microsoft's Azure, and Alphabet's Google Cloud, spent over $190 billion on the stuff needed to run their businesses, up from $117 billion in 2023.
Toss in all the other companies' efforts across most industries, and you're talking about one very big tailwind. It is little wonder that technology stocks have led the stock market rally over the past two years.
Cracks in the armor appear, increasing recession risk
Lurking under the surface of this raging bull market has been a growing disparity between those with money and those without it. While unemployment remains very low (near 4%), many remain cash-strapped.
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Inflation may have slowed, but prices are still rising. Those increases are on top of the recent steep increases, meaning more money flows from budgets to living costs than ever.
Worse, while interest rates have recently fallen, the burden of variable-rate debt, including credit cards, is heavy.
Credit cards were never cheap, but it wasn't that long ago that they were easy to find with rates nearer 10% and 0% introductory offers for extended periods were common.
Nowadays, according to WalletHub, the average interest rate on newly issued and existing credit cards was 22.6% and 21.47% in February. For perspective, it was about 17% for new cards in 2011 and about 12% for existing cards in 2013.
Cheap no. Better than now? Yes.
The price of homes is higher, and car payments sound like mortgage payments of days gone by.
With so much pressure, it's unsurprising that consumers feel a bit uneasy, something Stephen Guilfoyle thinks is worrisome.
The Conference Board recently released its Consumer Confidence survey for February, and the results weren't great.
"At the headline level, the reading for consumer confidence dropped to 98.3 in February from 104.1 for January and well below the more than 102 that economists were looking for," said Guilfoyle in a post on TheStreet Pro.
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The Conference Board's data "was the steepest one-month drop for this series since August of 2021, "said Guilfoyle. "Within the report, the Present Situation Index fell to 136.5 from 139.9, while the Expectations Index fell all the way to 72.9 from 82.2. All the while, median inflation expectations increased from 4.2% to 4.8%."
The data followed the previously reported University of Michigan's Consumer Sentiment Survey results that Guilfoyle says were "awful."
So, while the economy seems to be humming along, investors may not want to become overly complacent.
"There's no way to make last week's Consumer Sentiment survey and this week's Consumer Confidence survey smell sweet," said Guilfoyle. "If these results are accurate, and they very well may be as they agree with one another (Often these two surveys do not agree), the US consumer is preparing for an outright economic recession. This put more pressure on Treasury yields on Tuesday as investors continued to seek safe haven assets while exiting positions in risk assets."
