Consumer stocks are the latest market barometer

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Consumer stocks are diverging. A raft of recent sector results is starting to give an idea of how inflation and tariff threats are hitting bottom lines. The trends we’re seeing paint a very clear picture of US consumers’ pockets under pressure, as well as what company bosses are concerned about heading into the summer and second half of 2025.

Importantly for investors, the stream of updates is offering quite clear patterns among the sector players, with the gap between beneficiaries and laggards widening. Here are three themes emerging:

Maybe the biggest trend, as inflation has scuppered consumer spending power, is the flight to low-priced retailers. Middle-income consumers are feeling the pinch and trading down to the dollar discounters, with most reporting rising earnings and lifting guidance.

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Last week, Dollar General reported its first earnings per share (EPS) gain in nine quarters, upping its sales growth expectations in light of increased spending. Dollar Tree struck a more cautious tone but still managed to increase net sales by 11.3% to $4.6bn during the first quarter, just pipping analyst expectations. Even with tariffs in mind, it expects full-year net sales to come in at the higher end of its 3-5% outlook range. Five Below saw net sales jump by 19.5% to $970.5m, lifting sales guidance too. And Ollie’s Bargain Outlet topped Q1 expectations, raising its 2025 sales guidance in last week’s results.

Tariff mitigation was a big focus for this part of the sector, with varying degrees of optimism. Most are prepping their businesses to absorb costs as much as possible but the worry is even greater cost pressures stop discretionary consumer spending as belts tighten.

You might think there would be a similar pattern of restaurant-goers slipping down the food chain, swapping a knife and fork for a plastic tray and chairs bolted to the tiles. It’s a more nuanced story but the headline figures show it isn’t playing out like that.

Last month, McDonald’s reported dips in EPS and global sales, with US same-store sales dropping by 3.6% - the worst quarterly fall since the pandemic began in 2020. That fall might be explained in part by the fact that Campbell Soup just reported its highest sales since 2020. With eating out getting more expensive at all levels (McDonald’s says the average price of a Big Mac Meal rose from $7.29 in 2019 to $9.29 in 2024, a 27% increase) consumers are clearly dropping down a few rungs on the meal-time ladder and staying in instead.

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Restaurant Brands International (Burger King, Tim Hortons, Popeyes) saw US same-store sales drop across its portfolio but investors might be buoyed by the international arm picking up the slack, contributing significantly to a 21.3% increase in year-on-year revenues. Yum! Brands (KFC, Pizza Hut, Taco Bell) doesn’t break down US performance but made similar noises about non-US markets delivering growth, supported by plans to bolster Taco Bell’s presence internationally.

International markets providing a glimmer of hope is also a bit of a theme when it comes to the slightly more upmarket retail scene.

To put it bluntly, the share prices of Lululemon, PVH (Calvin Klein, Tommy Hilfiger) and G-III Apparel (Champion, Converse) have fallen off a cliff. Lowered guidance (withdrawn entirely in the case of G-III) prompted large selloffs, with inflation and tariff headwinds front and centre of the market’s worries. However, Lululemon’s international footprint did its best to make up for a drop in American sales. The trouble is ‘Americas’ still accounts for 71% of total net revenue, stymying progress elsewhere.

Relying on Chinese manufacturing in the apparel industry is making firms even more vulnerable than most to tariffs, nevermind waning appetites for more expensive clothes in a period of higher inflation.

So, the takeaway seems to be that the more upmarket you go, the more exposed to consumers’ nerves, and purse strings, you are. It might seem a simple thing to say but it’s an important trend to see in action, especially with tariff concerns taking away some companies’ ability to guide on their own immediate future. Consumer fatigue is real and a laserlike focus on value is underpinning big shifts in where the next dollar is spent. The University of Michigan Consumer Sentiment Index dropping to lows last seen in 2022 is a sign household budgets will likely stay tighter for longer too.

So, with companies struggling to give an accurate outlook, here are five things to keep an eye on as we head into the summer and back half of 2025:

1. Muddy outlooks are being punished. Prepare for more volatility where forward-looking statements are blurry or absent.
2. If tariffs are inflationary, it’s reasonable to see these current trends continuing or accelerating, where firms struggle to alter course.
3. The most punished stocks seem to be the ones staying quiet on tackling supply chain issues, conserving pricing power and maintaining operating margins. How they update the market now is key.
4. Trading down has its limits. Watch for the subsectors consumers are bypassing on their way to a much cheaper option.
5. Pay attention to starting valuations. Resilience over Covid meant a lot of sectors known for dependability and resilience attracted higher valuations. These could be under threat if slowing earnings start to make that reputation a little shakier.

Sources: Company reports

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.