The U.S. consumer, seen as the driver of the economy, plays a pivotal role in shaping economic growth and, by extension, stock market performance. With consumer spending accounting for roughly 70% of U.S. GDP, the health of the consumer directly influences corporate revenues, profit margins, and investor sentiment. The state of the U.S. consumer is a mixed bag at this point showing resilience in hard data but showing deep cracks in soft data. Last Friday, the preliminary Consumer Sentiment data dropped to 50.8, down from 52.2 in April and hitting its second-lowest reading on record. However, the majority of the survey was completed before the U.S. and China announced a 90-day pause on most tariffs between the two countries. The trade situation appears to be a key factor weighing on consumer sentiment and inflation expectations. Year-ahead inflation expectations rose to 7.3% from 6.5% last month, while long-term inflation expectations ticked up to 4.6% from 4.4%. While the data suggests a bleak outlook for the economy, a glaring reminder that it is a small-sample survey that may have a lot of bias in the numbers.

The hard data tells a different story. The jobs market may be the key to consumer spending as a person with a job will continue to make purchases, although habits may change. Weekly jobless claims data reflects continued confidence in historically low numbers and non-farm payrolls for April came in above expectations again at 177,000 jobs added, which was above expectations. The unemployment rate held steady at 4.2%, which is reflective of full employment in the U.S. The solid jobs data reflects that the consumer is still in a good spot and that lends confidence in economic growth. An old adage for markets has always been ‘Dare to bet against the U.S. consumer’ and Warren Buffett is famously quoted as saying "Never bet against America".

What does this mean for markets? Equities are on tear this month with the S&P 500 (SPX) up 7% on the back of progress on tariffs and potential trade deals. While they are still unconfirmed for the most part, investors still seem confident that negotiations are progressing to a positive outcome. Stock valuations are expanding on the back of the optimism with the forward PE on the benchmark S&P 500 (SPX) at 21.4 according to FactSet. This is above the 5-year average of 19.9 and the 10-year average of 18.3, indicating the market is trading at a premium relative to historical norms.

Retail earnings are a mixed bag at this point. Retail bellwether Walmart (WMT) beat expectations last week and reiterated their FY26 guidance but did state they may have to raise some prices due to tariffs. Home Depot (HD) reported an earnings miss on EPS this morning with sales falling 0.3%, but the company reaffirmed FY25 estimates. This reflects that retailers feel the consumer will remain vigilant this year despite the macro headwinds as long as they have a job.  

The U.S. consumer remains a critical driver of economic and stock market performance, but cracks are emerging. While spending has held up, thanks to a strong job market and wage growth, rising debt, declining savings, and persistent inflation pose risks to sustained consumption. For investors, this environment may call for selective exposure, favoring companies with strong balance sheets, pricing power, and alignment with evolving consumer trends. As the Federal Reserve navigates monetary policy and geopolitical uncertainties loom, the resilience of the U.S. consumer will continue to shape market outcomes. In conclusion, watch the jobs data for clarity on the consumer and the health of the economy – the Fed is and so should you.

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