Despite continuous rising prices, American consumers continue to spend their wages. Even as diesel prices approach record highs, they still buy pickups; and with beef prices soaring, they still enjoy lavish steak dinners.
This is undoubtedly good news for the economy and markets, but Wall Street is concerned that such a situation is unlikely to be sustainable. Retail sales and personal consumption expenditure continue to grow, but so does the scale of consumer borrowing. At the same time, persistently high oil prices and rising yields on U.S. Treasury bonds are hitting consumer sentiment hard. The preliminary Consumer Confidence Index released by the University of Michigan on Friday dropped to a five-month low, while inflation expectations have further increased.
All this has made Wall Street increasingly concerned that this consumer frenzy is about to come to an end, thereby removing an important pillar that has supported the U.S. stock market at near-record highs.
Accuvest Global Advisors Chief Investment Officer Eric Clark stated: "Consumers cannot afford to bear rising prices forever. Most of the time, wage growth cannot keep up with the inflation we are experiencing, which forces consumers to make trade-offs."
As the financial reporting season approaches, investors and strategists are focusing on the consumer situation. This week, as large banks begin to release their earnings, they will pay close attention to credit card spending data; as the holiday shopping season nears, retailers' guidance on future sales prospects will also be closely watched.
NATIONAL INVESTMENT STRATEGIST AT BANK OF AMERICA, Tom Hainlin, stated: "We are looking for signs of consumer fatigue. With the continuous rise in food and gasoline prices, will it ultimately become too much for consumers to bear?"
The overall sentiment on Wall Street is bearish, with analysts continuously lowering their profit forecasts for both non-essential and essential consumer goods sectors. At the beginning of the year, inflation triggered by tariffs and soaring oil prices prompted analysts to lower their forecasts; recently, the Federal Reserve's interest rate hikes and the surge in U.S. Treasury yields have further increased borrowing costs, leading to even more pessimistic expectations.
According to compiled data, investors currently expect negative growth in profits for both non-essential and essential consumer goods sectors, for the first time since the end of 2024. It is anticipated that these two sectors will drag down the expected profit growth of the S&P 500 index by about 30% in 2026.
Omen of doom
Although the combined weight of these two sectors accounts for only 13% of the S&P 500 index, due to the importance of consumers to the U.S. economy, their weakness is still seen as an ominous sign. If there is a noticeable reduction in spending by households on large items such as hot tubs, which are typically purchased using credit cards during the holiday season, it will be regarded as an early warning signal of a slowdown in overall consumer spending.
HB Wealth Management Chief Market Strategist Gina Martin Adams stated: "Consumers may exhibit extremely weak performance, which could erode market confidence in the overall economy. Such an impact is sufficient to change the situation."
However, she believes that given that recent data on consumer spending and wage growth remain strong, such a situation is unlikely to occur for the time being. But she pointed out that the problem will first be reflected in a decrease in demand for major durable goods purchased through borrowing.
"From refrigerators, furniture, cars to housing," Martin Adams stated, "these categories of durable goods that are most sensitive to interest rates are the best indicators of consumer weakness."
Giant Burger sales decline
At McDonald's, the sales of the Big Mac are declining, and the company's stock price has fallen by 23% this year, set to record the worst annual performance since 2002.
Ameriprise Advisor Services Chief Market Strategist Anthony Saglimbene stated: "For all goods that need to be transported by truck, the prices are on the rise."
Investors have begun to make early arrangements, withdrawing on a large scale from the sectors of essential and non-essential consumer goods. Since the beginning of this year, both sectors have underperformed the S&P 500 index.
Globalt Investments, a senior portfolio manager, said: "Including us, many people originally thought that consumers wouldn't be able to hold on any longer, but the current level of consumption is still surprising." He is currently slightly underweight in the consumer goods sector and prefers companies with stable customer bases, such as Costco and Casey, rather than consumer goods manufacturers.
Baird Investment Strategy Analyst Ross Mayfield stated: "I believe that the consumption difficulties reflected in the stock market may be more severe than what the economic data indicates."
The unresolved question is whether weak consumption will ultimately affect the overall market in the current market environment dominated by the investment boom led by AI. Analysts expect a 25% increase in profits in the third quarter, mainly due to large technology companies and the profit growth in the energy industry brought about by high oil prices.
Mayfield indicates that this has turned the current market into a special period in history. U.S. stocks typically rely on consumer-driven sales growth and improved profit margins for growth, but this round of bull market has been mainly driven by the technology sector. At the same time, the issue of insufficient market breadth is becoming increasingly serious. Last week, the S&P 500 index reached a record high, but only about one-third of its constituents were above the 50-day and 100-day moving averages.
"The more concentrated the market is, the more vulnerable it is to shocks due to problems in any one link," stated Mayfield, warning investors not to ignore the fact that consumer demand is cooling down. "If there are issues with consumption, the market will decline."
