Consumer spending remains resilient, but sentiment signals downside risk

Companies such as Walmart (WMT), Costco (COST), and Proctor & Gamble (PG) are poised to benefit from resilient consumer demand in 2026, while consumer discretionary companies including Starbucks (SBUX) and Carnival Corporation (CCL) are likely to show signs of decreased foot traffic and volume pressure. This divergence reflects a broader macro dynamic: while overall consumption continues to increase, consumer trends are suggesting fear and aiming towards recessionary levels.  This suggests a growing disconnect between realized spending and forward-looking expectations. Historically, such divergences tend to be resolved through a slowdown in discretionary consumption.

Consumer health and sentiment

Recent personal consumption expenditure (PCE) data indicates continued nominal growth, supported by stable employment and wage gains. However, the trend appears to be shifting towards an increase in spending on non-discretionary items and value-oriented channels, while discretionary segments are starting to see a slowdown.

This suggests that while top-line consumption remains intact, consumer focus is changing, potentially resulting in deteriorating pricing power and margin compression in key discretionary categories.

The University of Michigan Consumer Sentiment Index, currently at 55.5, is significantly below long-term averages and consistent with prior recessionary environments. The sentiment index tends to function as a leading indicator of discretionary demand, the higher the sentiment index, the higher demand is for discretionary items.  At the current levels, consumers often hold onto their wallets and push off big-ticket and non-essential purchases.

This weakness in sentiment is primarily driven by the following macro events:

• Persistent inflation in essential categories
• Elevated interest rates impacting affordability
• Declining personal savings rates that are below the 20-year average
• Geopolitical tensions and conflict in the Middle East

While spending has not yet fully adjusted, historical patterns suggest that prolonged sentiment deterioration typically leads to lagged consumption declines, particularly in cyclical sectors, such as consumer discretionary.

Income-based spending divergence

A key feature of the current environment is increasing income-based divergence in spending behavior. Higher-income consumers—who account for a disproportionate share of aggregate consumption—continue to exhibit relatively inelastic demand. In contrast, lower- and middle-income households are experiencing tighter financial conditions, reflected in rising credit utilization and increased sensitivity to price.

This dynamic creates a K-shaped consumption profile, with implications to certain market segments:

• Premium and value-oriented segments, companies like Tapestry (TPR) and Ralph Lauren (RL), remain relatively insulated
• Mid-tier operators, such as Target (TGT) and Carmax (KMX), face demand compression and margin pressure

This bifurcation is particularly evident in retail and consumer discretionary sectors.

From an equity perspective, the current environment favors defensive and value-oriented business models with strong pricing power and scale advantages.

Walmart (WMT) and Costco (COST) continue to capture foot traffic through price leadership and supply chain efficiency, while Amazon (AMZN) could benefit from structural advantages in distribution and price transparency. These companies are positioned to outperform in a trade-down environment.

Income-based spending divergence

A key feature of the current environment is increasing income-based divergence in spending behavior. Higher-income consumers—who account for a disproportionate share of aggregate consumption—continue to exhibit relatively inelastic demand. In contrast, lower- and middle-income households are experiencing tighter financial conditions, reflected in rising credit utilization and increased sensitivity to price.

This dynamic creates a K-shaped consumption profile, with implications to certain market segments:

• Premium and value-oriented segments, companies like Tapestry (TPR) and Ralph Lauren (RL), remain relatively insulated
• Mid-tier operators, such as Target (TGT) and Carmax (KMX), face demand compression and margin pressure

This bifurcation is particularly evident in retail and consumer discretionary sectors.

From an equity perspective, the current environment favors defensive and value-oriented business models with strong pricing power and scale advantages.

Walmart (WMT) and Costco (COST) continue to capture foot traffic through price leadership and supply chain efficiency, while Amazon (AMZN) could benefit from structural advantages in distribution and price transparency. These companies are positioned to outperform in a trade-down environment.

Vulnerable segments and downside risks

Conversely, mid-market discretionary companies such as Starbucks (SBUX) and Marriott International (MAR) face a more challenging backdrop. These companies are exposed to:

• Demand elasticity in discretionary categories
• Increased promotional activity
• Inventory management risk

Additionally, sectors tied to interest-rate-sensitive consumption, including automobiles, such as Ford Motor Company (F), and durable goods, such as Lennar Homes (LEN), remain vulnerable to further demand softening.

The risk to focus on is consumption converging with sentiment. Some leading indicators to keep an eye on include:

• Rising consumer credit delinquencies
• Continued decline in savings
• Inventory accumulation in discretionary retail
• Labor market softening (particularly wage growth deceleration)

A deterioration across these indicators would likely result in negative operating leverage across discretionary sectors.

While headline consumption data remains supportive, the underlying fundamentals point to increasing fragility in the U.S. consumer. The combination of depressed sentiment, shifting consumption mix, elevated energy prices, and income-based divergence suggests that current spending levels may not be sustainable. The key question is not whether the consumer slows down, but how quickly spending patterns mirror sentiment.