Concerns over economic stability in the U.S. are weighing heavily on stocks that depend on consumer spending, with retailers, airlines and restaurant operators facing mounting financial strain. The uncertainty surrounding President Donald Trump’s trade policies has added to the pressure, unsettling investors and contributing to a downturn in the markets.
The S&P 500 Consumer Discretionary Index has declined for the fourth consecutive week, registering a 15% drop over the past month, almost double the decline seen in the broader S&P 500 Index. A series of lackluster earnings forecasts from major retailers ignited the recent selloff, which was further exacerbated by the downgraded outlooks from top U.S. airlines earlier this week.
Consumers, already burdened by years of persistent inflation, are exhibiting increased caution in their spending habits. Data from the University of Michigan released on Friday indicated that U.S. consumer sentiment has plunged to its lowest level in over two years, with long-term inflation expectations rising at the fastest pace since 1993.
“We and others accepted the consensus view that the Trump administration would be very pro-growth generally, and even if that benefited the highest income households the most, there would be a general lift,” said Patrick Kaser, portfolio manager at Brandywine Global Investment Management. “Given that what we’ve seen out of Washington has been disruptive to stability, confidence, and growth, absolutely our view has deteriorated on the security of the U.S. consumer.”
Retail stocks have suffered significantly, with the S&P Retail Select Industry Index poised for its worst weekly performance since March 2023. Disappointing earnings reports from Kohl’s Corp. and Dick’s Sporting Goods Inc. reinforced investor concerns about American consumers’ financial health. These underwhelming forecasts follow similar warnings from Walmart Inc., Best Buy Co., and Abercrombie & Fitch Co. in recent weeks.
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“The outlooks are normally a bit more cautious at the start of the year,” said John Zolidis, founder of Quo Vadis Capital. “We’re seeing that, but companies are talking about more uncertainty.”
Retailers have reported weaker-than-expected sales trends toward the end of February—a period that is typically slow post-holidays, but still a potential warning sign. The U.S. Commerce Department is set to release February’s retail sales data on Monday, which will offer further insight into consumer behavior.
Brandywine’s Kaser noted that his firm has recently reduced its exposure to consumer discretionary stocks, including cutting back investments in an automaker due to tariff-related uncertainties. Instead, they have shifted focus to consumer staples companies such as Kroger Co., Dollar General Corp., and Tyson Foods Inc., which provide essential goods and have relatively attractive valuations.
Dollar General revealed on Thursday that some of its customers are under such financial strain that they are cutting back on even basic necessities. Meanwhile, higher-income consumers are increasingly shopping at discount chains, reflecting a broader shift in spending behavior.
Travel and leisure stocks have also suffered amid concerns about declining consumer demand. Delta Air Lines Inc. recently lowered its revenue and profit projections for the current quarter, citing macroeconomic concerns and a slowdown in leisure travel demand. Similar warnings from American Airlines Group Inc. and Southwest Airlines Co. have contributed to a sharp selloff in airline stocks, which have fallen 10% this week following an 11% decline last week—their worst performance in two years.
“It’s hard to see how the ‘short-term pain’ caused by the White House does not impact the coming quarters,” wrote TD Cowen analyst Tom Fitzgerald. “We are entering the time of year when many people book their summer travel, which seems like it could be at risk if consumers are concerned about a recession and/or their employment.”
Hotel operators, online travel agencies, and cruise lines are also feeling the pressure. A key index tracking these industries has dropped 6.5% this week after a 7.4% decline last week.
Investors are now shifting their focus to upcoming earnings from Nike Inc., which could provide further insight into consumer sentiment. As the company undergoes a turnaround under new leadership, its results will be closely analyzed for signals about consumer spending trends across various income groups, according to Quo Vadis Capital’s Zolidis.
Bloomberg Intelligence analyst George Ferguson noted that middle- and lower-income consumers are likely to reduce discretionary spending on leisure travel, dining out, and other non-essential activities. The S&P Composite 1500 Restaurants Index has dropped 6.2% this week, marking its worst decline since October 2020.
“For that bottom 60% or so of American consumers, it really is a tough environment getting tougher,” said Brandywine’s Kaser. He added that recession risks have risen over the past month, with trade disputes threatening to have a significant impact on the U.S. economy.