Amid the constant twists and turns of the Middle East conflict, irrepressible equity market enthusiasm and a growing slate of potential blockbuster IPOs, there has been little room to focus on the health of the U.S. consumer in recent months.
In some ways, that inattention is understandable. Consumers have so far absorbed elevated inflation, high policy rates and a softening jobs market without meaningfully pulling back on spending, a resilience that has been the foundation of U.S. economic growth. But resilience is not the same as invulnerability, and the conditions that sustained it are shifting.
Now over one hundred days into the Middle East conflict and restrictions on traffic through the Strait of Hormuz, the cumulative pressure on the consumer—something we have forewarned about—is increasingly hard to dismiss.
Cracks in the Foundation
Elevated oil and gas prices draw the most attention, but the inflationary reach of the conflict extends considerably further. Rising jet fuel costs are feeding into airline fares and freight rates; fertilizer prices are climbing into an already difficult El Niño growing season; and food price uncertainty is building.
Taken together, these pressures are doing something the headline energy data does not fully capture—eroding consumer balance sheets from multiple directions at once.
This is made clear in the numbers. Tax refunds under the One Big Beautiful Bill Act added roughly $50 billion to consumer wallets. Yet according to our research, higher fuel costs have clipped approximately two-thirds of that gain—producing a net annualized headwind of around $100 billion, or roughly 70 basis points of consumer spending power.
The wage picture compounds this. Prices are now rising at +4.2% annually while wages are growing at only +3.4%, a gap that is eroding purchasing power. In the post-pandemic inflation surge, strong wage growth provided a genuine cushion for consumers. But a very different supply-demand dynamic within the U.S. labor market is unlikely to provide similar support over the coming months.
Notably, while the K-shape in after-tax wage growth between income cohorts is as pronounced as at any point since 2015, Bank of America says this divergence also persists even within higher earners: the top 5% saw wage growth of nearly +10% year-over-year in April against +4.6% for the rest of that group.
At the same time consumers’ purchasing power is being squeezed, real personal disposable income has turned negative year-over-year for multiple consecutive months. This has happened even as consumption has held up—marking one of the widest gaps between income and spending in decades, with the difference funded by savings now at approximately 2.6%, near pre-Global Financial Crisis lows.
The developing picture is therefore of a consumer still spending, but with diminishing means to do so.
A K-Shaped Reckoning
Critically, this is not a uniform story. Our research confirms that wealth, not income, is funding incremental spend—most visibly expressed in travel and experiences, where Generation YZ spend is up approximately 10% year-to-date, largely driven by record intergenerational wealth transfer. Meanwhile, middle- and lower-income consumers are flat to negative in real spending terms, squeezed by inflationary crosswinds from energy and food costs only partially offset by tariff relief and by widening income inequality.
Markets are beginning to reflect this. Consumer discretionary, excluding Amazon and Tesla—whose scale and idiosyncratic dynamics can obscure broader sector trends—outperformed the S&P 500 by 800 basis points ahead of the conflict. It has since retraced that entire gain and is now underperforming by 800 basis points, with roughly 700 basis points of that reversal driven by multiple compression rather than earnings cuts.
The fundamental reckoning, should spending soften further, may still lie ahead. Earnings revisions across the sector have been flat to negative and almost entirely oil-related. For some investors, higher energy prices are simply the tipping point for an already stretched consumer, underpinning attitudes of apathy and distrust. Yet that, in our view, creates selective opportunity—more likely in individual stocks than subsectors, with experiences over goods as our core theme and travel as its backbone.
Implications for Portfolios
We maintain our overweight to global equities, underpinned by an exceptional first quarter earnings season—84% of S&P 500 reporters beat expectations, with average year-over-year earnings growth of +27.1%. But we are watching consumer discretionary, financials and the labor market closely. May payrolls were solid, yet our fixed income team believes the balance of risks is tilted to the downside.
With the Federal Reserve meeting this week against a backdrop of a three-year inflation high and a consumer balance sheet under growing strain, the path forward for rates carries more consequence than usual. A softening jobs market arriving alongside a depleted savings buffer and rising non-discretionary costs would shift the outlook materially.
The U.S. consumer has defied expectations many times in recent years, and we see no clear sign yet that resilience is about to give way. But the buffers are thinner, the pressures more layered, and the risks more concentrated than the headline data suggests. If spending does soften materially, the implications for U.S. growth—and for consumer-facing equities especially—would be hard to ignore.
For now, we remain constructive, particularly given the economic lift that capital expenditure will deliver. But this is precisely the moment to stay close to the data, because the answer to how much longer that resilience can last may come sooner than markets expect.
What to Watch For
Monday 06/15:
- Japan BoJ Interest Rate Decision
Tuesday 06/16:
- Australia RBA Interest Rate Decision
Wednesday 06/17:
- U.S. Fed Interest Rate Decision
- Eurozone Consumer Price Index
- U.S. Core Retail Sales
Thursday 06/18:
- Switzerland SNB Interest Rate Decision
- U.K. Interest Rate Decision
- U.S. Initial Jobless Claims
- U.S. Philadelphia Fed Manufacturing Index