MW Stock market's consumer sectors are 'unfavorable' after lagging S&P 500 earnings growth

By Christine Idzelis

Tariffs may 'ultimately constrain households,' says Wells Fargo

Investors are keeping an eye on consumer spending amid tariff concerns.

The U.S. stock market's consumer sectors remain "unfavorable" amid ongoing concern over how tariffs may change shopping behavior, according to the Wells Fargo Investment Institute.

Recent second-quarter earnings from consumer companies in the S&P 500 SPX "showed mixed results that suggested tariff uncertainties were affecting shoppers," said Douglas Beath, global investment strategist at the Wells Fargo Investment Institute, in a note Monday.

With second-quarter results nearly wrapped up, consumer staples and consumer discretionary lagged the year-over-year earnings growth rate of the S&P 500, said Beath. In the chart below, Wells Fargo also tracked how the actual results stacked up against earnings-growth estimates.

WELLS FARGO INVESTMENT INSTITUTE

In terms of stock-market gains, consumer staples and consumer discretionary are among the worst performers of the S&P 500 index's 11 sectors so far this year, after healthcare, energy and real estate, according to FactSet data, at last check.

The S&P 500 index has climbed 10.4% in 2025 through Monday - well above the consumer-discretionary sector's 3.7% rise and the 4.1% increase for consumer staples.

Walmart Inc. $(WMT)$, the giant retailer in the S&P 500's consumer-staples sector, saw its shares slump 4.5% on Aug. 21, the day it released its second-quarter earnings report. The company missed profit expectations, with Chief Executive Doug McMillon indicating during the earnings conference call that Walmart was seeking to keep prices low despite tariffs.

"With regard to our U.S. pricing decisions given tariff-related cost pressures, we're doing what we said we would do," he said, according to a FactSet transcript of the call. "We're keeping our prices as low as we can for as long as we can."

Read: Walmart says tariffs are raising costs, but it's trying to avoid price increases - for now

Investors are monitoring the extent to which companies are willing to absorb tariffs into their profit margins versus attempting to pass those higher costs on to their customers.

"The unexpected drawn-out tariff scenario that has been ongoing since April has led us to revise our 2025 U.S. economic growth forecast upward, while lowering expectations for 2026," Wells Fargo's Beath said. "We still believe that tariff deferrals do not equate to elimination and anticipate they will ultimately constrain households and limit spending into late 2025 and early 2026," he wrote. This may "dilute the positive impacts of front-loaded tax cuts and deregulation."

The Fed's latest so-called beige book, a report published eight times a year that gathers anecdotal information regarding economic conditions, found that "contacts reported flat to declining consumer spending because, for many households, wages were failing to keep up with rising prices." The beige book, which was released Sept. 3, also said that "contacts frequently cited economic uncertainty and tariffs as negative factors."

See: Slower hiring, rising prices, wary consumers: Fed's beige book points to sluggish economy

Mark Valentino, head of business banking at Citizens, told MarketWatch in a phone interview that the bank's small-business clients, a large position of which are "mom and pop" shops, are trying to adapt to higher costs created by tariffs in part by seeking to replace certain suppliers.

"Our customers are absolutely looking for replacement products and replacement countries where tariffs might be lower," he said. "But it's not such an easy thing to achieve when your scale is not massive."

While it's too early to tell how much "pain" small businesses may experience from tariffs, Valentino said that he has started to see demand for loans go up among such clients at Citizens. Maybe that means businesses are "getting off the sidelines" and starting to make decisions on capital projects as they move beyond the initial jolt from tariffs - but the demand for loans could also be part of an effort to weather a potential economic slowdown, he said.

The U.S. stock market closed higher Monday, with the S&P 500 rising 0.2%, the technology-heavy Nasdaq Composite COMP gaining 0.5% and the Dow Jones Industrial Average DJIA advancing 0.3%, according to Dow Jones Market Data. The Nasdaq ended at a fresh record high.

Big Tech stocks - which span the S&P 500's tech, consumer-discretionary and communication-services sectors - helped buoy the index on Monday.

Check out: This chart points to 'the upside story' for AI across the S&P 500's sectors

The S&P 500's sectors closed the trading session mixed, with tech and consumer discretionary seeing the strongest performance, according to FactSet data. As recently as the morning of Aug. 29, the sectors with the strongest second-quarter earnings growth on a year-over-year basis were communication services, tech and financials, the Wells Fargo note shows.

The S&P 500, which has an outsized weighting to Big Tech, edged up Monday toward its record peak notched just last week. The U.S. equities benchmark finished just 0.1% shy of its all-time closing high booked Sept. 4, according to Dow Jones Market Data.

-Christine Idzelis

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September 08, 2025 16:50 ET (20:50 GMT)

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