Despite ongoing price increases, American consumers continue to spend their wages. As diesel prices approach historic highs, they still buy pickup trucks; and as beef prices surge, they still enjoy steak dinners.
This is undoubtedly good news for the economy and markets, but Wall Street worries that this situation may not be sustainable. While retail sales and personal consumption expenditures continue to rise, consumer borrowing is increasing at the same pace. Meanwhile, persistently high oil prices and rising U.S. Treasury yields have weighed heavily on consumer sentiment. The University of Michigan’s preliminary consumer confidence index, released on Friday, fell to a five-month low, while inflation expectations climbed further.
All of this has made Wall Street increasingly concerned that this spending spree is about to end, removing a key pillar supporting U.S. stocks near their historical highs.
Eric Clark, Chief Investment Officer at Accuvest Global Advisors, said: "Consumers cannot indefinitely absorb rising prices. Often, wage growth fails to keep pace with the inflation we’re experiencing, forcing consumers to make trade-offs."
As earnings season approaches, investors and strategists are focusing on consumer conditions. When major banks begin reporting results this week, they will closely examine credit card spending data; as the holiday shopping season nears, retailers’ guidance on future sales prospects will also be closely monitored.
Tom Hainlin, National Investment Strategist at Bank of America, said: “We are looking for signs of consumer fatigue. With food and gasoline prices continuing to rise, will consumers eventually be overwhelmed?”
Overall sentiment on Wall Street remains bearish, with analysts continuously lowering earnings forecasts for the discretionary and non-discretionary consumer sectors. At the start of the year, inflation triggered by tariffs and surging oil prices prompted analysts to revise down their projections; recently, further interest rate hikes by the Federal Reserve and a sharp rise in U.S. Treasury yields have increased borrowing costs, pushing expectations even lower.
Based on compiled data, investors currently expect negative earnings growth in the consumer discretionary and consumer staples sectors—the first such decline since the end of 2024. These two sectors are projected to account for approximately 30% of the S&P 500’s expected earnings growth in 2026.
Warning sign
Although these two sectors together account for only 13% of the S&P 500 index weight, their weakness is seen as an ominous sign due to consumers' critical importance to the U.S. economy. A noticeable decline in household spending on big-ticket items—typically purchased with credit cards, such as hot tubs—during the holiday season would be viewed as an early warning signal of broader consumer spending slowdown.
Gina Martin Adams, Chief Market Strategist at HB Wealth Management, said: "Consumers may exhibit extremely weak behavior, eroding market confidence in the overall economy. That kind of shock could be enough to change the situation."
However, she believes that, given the continued strength in recent consumer spending and wage growth data, this scenario is unlikely to occur in the near term. She notes that the issue will first manifest as reduced demand for big-ticket durable goods purchased on credit.
“From refrigerators, furniture, and cars to housing,” said Martin Adams, “these durable goods categories most sensitive to interest rates best reflect consumer weakness.”
Big Mac sales decline
At McDonald's, Big Mac sales are declining, and the company's stock has fallen 23% this year, on track for its worst annual performance since 2002.
Anthony Saglimbene, Chief Market Strategist at Ameriprise Advisor Services, said: "Prices are rising for any goods that need to be transported by truck."
Investors have begun positioning themselves in advance, withdrawing significantly from the consumer staples and consumer discretionary sectors. Year to date, both sectors have underperformed the S&P 500 Index.
Thomas Martin, Senior Portfolio Manager at Globalt Investments, said: “Many of us, including ourselves, originally thought consumers would buckle under pressure, but the current strength of consumer spending remains surprising.” He is currently slightly underweight in the consumer sector and prefers companies like Costco and Casey’s, which have stable customer bases, over consumer goods manufacturers.
Baird investment strategy analyst Ross Mayfield said: "I believe the consumer difficulties reflected in the stock market may be more severe than what economic data suggests."
The outstanding question is whether weak consumer spending will ultimately impact the broader market in the current environment, dominated by an AI investment boom. Analysts expect earnings growth of 25% in the third quarter, primarily driven by large technology companies and higher oil prices boosting profits in the energy sector.
Mayfield said this has made the current market a historically unique period. U.S. equities have typically relied on consumer-driven sales growth and margin expansion, but this bull market has been primarily driven by the technology sector. Meanwhile, the issue of narrow market breadth is growing more pronounced. Last week, the S&P 500 reached a new all-time high, yet only about one-third of its components traded above their 50-day and 100-day moving averages.
“The more concentrated the market, the more vulnerable it is to shocks from issues in any one area,” Mayfield said, warning investors not to ignore the fact that consumer sentiment is cooling. “If consumption falters, the market will decline.”