Stock prices are soaring, but consumer confidence still weak

MarketWatch reports that stock market investors should be wary of over-optimism since consumer confidence levels are still falling.

With a second survey in less than one week showing consumer confidence falling, some strategists believe that investors' market expectations are running well ahead of economic realities and that a wake-up call might come after earnings season.

Since the flow of corporate results started in early July, the broad S&P 500 index has rallied 11%, with investors focusing on a large number of key results that have easily topped lowered market expectations.

But critics have signaled that many of the positive surprises have been based on cost-cutting measures while few firms have signaled any improvement in business conditions. And consumers' willingness to spend remains key to that process.

"Consumer confidence numbers are dropping in part because of future consumer expectations and investors should be heeding the warning," On Tuesday, the Conference Board said U.S. consumer confidence fell for a second month in July, underscoring still-gloomy sentiment about the U.S. economy.

"However, the markets may be setting up for a fall decline, as expectations are getting well ahead of economic reality."

Last Friday, the University of Michigan and Reuters also said consumer sentiment fell in July. Similarly, Gallup's latest weekly poll showed confidence confirmed a July drop following a decline in June. And while confidence remains "significantly higher" than a year ago, Gallup says the survey suggests "no sign yet of a similar uptick in job creation or consumer spending."

One area of confidence for consumers is the stock market, with 48% of Americans polled by Gallup in June expecting stocks to rise over the next six months. But the same poll revealed 57% of Americans think unemployment will also rise over the same period, sapping willingness to spend. Historically, consumer spending has made up about two-thirds of U.S. gross domestic production.