President Donald Trump’s fickle trade policies are raising concerns about US economic stability, and the stocks most reliant on the strength of the American consumer are starting to feel the pinch.
From retailers to airlines to restaurant operators, corporations that count on discretionary spending are having an increasingly difficult time, which is weighing on their bottom lines. Investors are reacting, sending the S&P 500 Consumer Discretionary Index down for a fourth straight week. The sector is down 15 per cent in the past month, almost double the decline in the broader S&P 500 Index.
A slew of disappointing earnings forecasts from retailers sparked the recent rout, and outlook cuts by the biggest US airlines last week accelerated the selloff. Consumer companies have been contending with budget-conscious Americans pressured by years of elevated inflation. And now they’re facing uncertainty over the Trump administration’s policies around trade and government spending.
US consumer sentiment fell to a more than two-year low in a preliminary March reading of University of Michigan data issued on Friday (Mar 14), while long-term inflation expectations jumped by the most 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 US consumer.”
The S&P Retail Select Industry Index suffered its worst week since March 2023 after earnings reports from Kohl’s and Dick’s Sporting Goods fuelled worries about Americans’ spending power. Both retailers issued weaker-than-anticipated annual forecasts, following similar disappointments at Walmart, Best Buy and Abercrombie & Fitch in the past month.
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“The outlooks are normally a bit more cautious at the start of the year,” said John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital. “We’re seeing that, but companies are talking about more uncertainty.”
Some companies flagged softer trends at the end of February, Zolidis noted. And although the month is often a less than ideal gauge since spending typically is slower after the holidays, it’s something he’s keeping an eye on. US Commerce Department data on February retail sales is expected on Monday.
Brandywine’s Kaser said the classic large-capitalisation value strategy portfolio he co-manages has dialled back its consumer discretionary holdings in recent weeks, trimming a position in an auto manufacturer amid uncertainty around tariffs. Meanwhile, it’s overweight consumer staples companies, which have attractive equity valuations and offer essential goods for consumers. Kroger, Dollar General and Tyson Foods are among current holdings.
Dollar General said on Thursday that some of its customers are under so much financial strain that they are pulling back on essential items, while higher-income consumers are shifting to shopping at discount chains.
Worries about consumer demand have also plagued stocks tied to the travel and leisure industry. Delta Air Lines last week cut its revenue and profit expectations for the current quarter, citing macro concerns and an ensuing slowdown in leisure demand. Then, American Airlines Group and Southwest Airlines echoed those warnings at an industry conference. All told, a gauge of airline stocks is down 8.1 per cent last week after tumbling 11 per cent in the prior week, its worst slump 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.”
Concerns over softer booking trends have pushed shares of hotel operators, online travel agencies and cruise lines lower. An S&P index tracking those industries dropped 6 per cent last week after sinking 7.4 per cent the prior week.
This week, investors will turn their attention to earnings from Nike. While the sportswear giant is in the midst of a turnaround effort under new leadership, the results should offer clues on consumer spending since it sells to many different income demographics, Quo Vadis Capital’s Zolidis said.
Pressure on middle and low-income consumers will likely mean less spending on everything related to leisure travel, such as hotels, restaurants and rental cars, according to Bloomberg Intelligence analyst George Ferguson. The S&P Composite 1500 Restaurants Index experienced its worst weekly drop since October 2020 with a 5.8 per cent decline.
“For that bottom 60 per cent or so of American consumers, it really is a tough environment getting tougher,” Brandywine’s Kaser said. He said the odds of a US recession have risen over the last four to six weeks, with trade wars threatening to have a “meaningful impact” on gross domestic product. BLOOMBERG
