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The breakdown

• How has the U.S. consumer sector held up during the first half of the year? (0:07 - 2:01)
• What is your outlook for the U.S. consumer sector for the rest of 2026? (2:02 - 3:18)

Video transcript

How has the U.S. consumer sector held up during the first half of the year?

Well, from a strictly stock market perspective, if you look solely at share prices and valuations of a lot of consumer names over the past six months, one would think the consumer is struggling, consumer spending is dissipating, and the outlook being priced in on a lot of these stocks is grim. So that's what the stock market would show you as equal weight discretionary is down about 3% year to date, versus equal weight market up 12%, underperforming by 15% over the past six months. 

The market has gotten so negative on consumer stocks. The consumer discretionary sector now holds a sub-10% weight in the S&P 500, which is often characteristic of a very weak economic environment. So looking at the sector and stocks as a whole, how much have they underperformed the market - you would assume that these companies have been missing their earnings expectations, forward consensus estimates will be decreasing, and management teams were speaking negatively on the consumer and their ability to spend. All of which has not happened. On a stock-specific level, most companies so far this year have actually delivered against earnings expectations, with management teams largely affirming outlooks and speaking quite positively about the consumer. So what has happened? 

Why have these stocks and the sector as a whole performed so poorly? Sentiment. Investors have been completely irrational on the consumer. The first part of the year was driven by AI fears, i.e. AI is going to replace humans, the unemployment rate will skyrocket and no one will have any disposable income - which then moved to gas price inflation, which became nearly apocalyptic for consumers’ ability to afford gas, believing all other discretionary spend would suffer. Despite the negative sentiment, this worst-case scenario has yet to materialize as the consumer remains incredibly resilient, which created a real buying opportunity in the first half of the year as stocks became mispriced.

What is your outlook for the U.S. consumer sector for the rest of 2026?

We continue to have a positive outlook on the U.S. consumer sector for the back half of the year. And while the glass always seems to be half empty for investors and you can probably almost always find a data point that would feed into the bear case - at the end of the day, the number one determinant of consumer spend, the labor market, i.e. do people have jobs, remains stronger than expected, fueling strong consumer health.

Furthermore, the overall health of the consumer is broad-based and not just focused on upper-income households. As recent data highlights, we are moving away from a K-shaped economy to a more balanced E-shaped economy. At the end of the day, while we may be operating more in a CapEx-driven cycle rather than a consumer-led cycle, sentiment had become way too disconnected from fundamentals, and so we are very positive on the consumer sector into the back half of the year.

Key takeaways

• The stock market's read on the consumer has been too pessimistic. Consumer stocks have fallen behind the broader market over the past six months - yet most companies continued to beat earnings expectations and management teams have remained confident. The negative sentiment simply hasn't matched reality.
• Fear drove stock prices down - but the scary scenarios never came true. First, people worried that AI would wipe out jobs and leave consumers with no money to spend. Then came fears that soaring gas prices would leave households with nothing left over. Neither happened - and because stocks had fallen so far on those fears, it created a strong opportunity to buy at low prices in the first half of the year.
• The American consumer has been stronger than expected. Despite all the doom and gloom, people kept spending, companies kept delivering, and the worst-case outcomes never materialized.
• It's not just higher-income households doing well - lower- and middle-income consumers are holding up too. The economy is becoming more balanced, with financial resilience broadening across income levels.
• The U.S. consumer outlook is anchored by a solid job market. Employment is the single biggest driver of consumer spending, and the latest data shows the labour market continues to hold up better than many expected.