A record divergence between consumer sentiment and hard economic data raises questions about the outlook for richly valued U.S. stocks.

Recently, much has been made about the divergence between hard and soft data on economic fundamentals in the U.S. On March 28, the Conference Board reported that its consumer confidence index rose to 125.6, 11.8 points above economists’ forecasts and the highest level since December 2000. Yet hard data such as durable goods orders and retail sales have not surprised to near this extent and have been running roughly in line with consensus expectations for 2% economic growth. Moreover, commercial and industrial lending is actually down through the first two months of 2017, after having risen at an annual rate of 9.7% for the previous five years through 2016. To quote Morgan Stanley, “the divergence is stunning.” While we don’t know how the gap between these indicators might be closed, if history is an indicator, consumer sentiment (and stock prices) tend to correct down. With U.S. equity valuations at or near historical highs amid strongly optimistic consumer sentiment, we believe a bottom-up, valuation-sensitive investment process is as important as ever.