Wall Street Might be Wrong to Hate Consumer Stocks

Dow Jones
2 hours ago

A quick look at the stock market shows that Wall Street doesn't have much confidence in the consumer, especially lower-income shoppers. However, that pessimistic outlook might be all wrong.

It's certainly understandable to doubt consumers' strength when you consider all the headwinds they are facing. Years of cumulative inflation since the pandemic have reduced Americans' buying power, and the Iran war's impact on energy prices is just the latest blow. The wealth gap continues to widen, consumer sentiment is near record lows, and people are worried about artificial intelligence replacing human workers. Not to mention that interest and mortgage rates keep rising, putting housing out of reach for more people than at any point in the last 40 years -- to the point that even six-figure earners are feeling the pinch of the affordability crisis.

With that backdrop, it becomes easier to understand the retail sector's overall struggle, and the diverging performance between discretionary stocks and staples stocks. The State Street SPDR S&P Retail exchange traded fund and State Street Consumer Discretionary Select Sector SPDR ETF are both in the red so far this year. Even the State Street Consumer Staples Select Sector SPDR ETF, which focuses on companies selling basic necessities, is up just 3.6%, despite the S&P 500's more than 13% gain in 2026.

"Our 'Tale of Two Economies' approach drives our economic views: red-hot nonresidential investment is 18% of core gross domestic product, while the larger income-squeezed consumer finances spending out of savings," writes Stifel Equity Strategist Thomas Carroll in his fourth-quarter outlook, summing up the popular wisdom among investors.

Yet those figures don't tell the whole story. After all, retail sales are still going strong, and the labor market -- the largest factor in most people's spending, has remained relatively steady. That suggests it isn't all doom and gloom for consumer stocks.

Take a look at the jobs market, where employment is up six in the past eight months. Silvercrest Asset Management Chief Investment Strategist Robert Teeter says that the labor market has been more resilient than many might have expected.

"Overall the consumer side of the economy appears to be supported largely by the job market_and could allow the underlying foundation of the economy to remain quite solid, even if higher [interest] rates begin to weigh at the margin on growth and other pressure points," Teeter adds.

That may be particularly true of lower-income consumers. As Bank of America analyst Shruti Mishra notes, after-tax wage growth for lower-income households reached 4.7% year over year in August, above the 3.5% gains logged by higher-income workers, bolstered by job-switching activity and blue-collar growth. That dovetails with the bank's credit card data, which showed lower-income spending improving even excluding gas, and including the much-maligned discretionary category. That suggests there is a shift of "consumer spending away from a pronounced K-shaped pattern toward something closer to a C, with the two arms beginning to converge," Mishra says.

The fact that higher-income households have a bigger cash cushion and are benefiting from stock market gains isn't new. But Mishra says viewing stock ownership as largely the realm of just the wealthy might be too simplistic.

"As housing affordability has become more challenging, some lower- and middle-income households may be increasingly turning to equity markets as an alternative vehicle for wealth accumulation," she says.

Aside from the 2008 financial crisis, the richest Americans have rarely pulled back in their spending. However, if those on the other end of the spectrum aren't as stressed, it could mean that a number of shunned stocks are oversold. That list would likely include Walmart (a Barron's pick), Five Below (where technicals appear to be in favor of a comeback), and the dollar stores. Higher discretionary spending is also good news for Target's turnaround.

Mishra admits there are some factors holding her back from being fully bullish on consumers, including ongoing high gas prices, cooling wage growth, and any potential disruption to the AI trade. That trade has fueled the current bull market -- and subsequent benefit to consumers' wealth.

Nonetheless, if more Americans are in better financial shape than bears fear, it could be a much-needed boost for beleaguered consumer stocks.

 

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