Follow The Consumer, They Lead The Way

US consumption, a key economic driver, is rebounding despite low sentiment, primarily propelled by the top 10% of earners who account for half of all spending. June retail sales showed a notable recovery, coinciding with the first positive goods inflation since 2023, signaling a shift from disinflation. New tariffs are expected to have a delayed and muted inflationary impact due to business adjustments, fostering continued consumer confidence, especially among high-net-worth individuals whose spending is tied to equity market performance. This dynamic is anticipated to support positive GDP growth, though a significant market or housing downturn remains a key risk.

Analysis

US consumption, which constitutes 68.30% of Q1 2025 GDP, is showing a notable rebound despite weak consumer sentiment, a divergence primarily explained by the concentrated spending power of high-income households. The top 10% of earners, responsible for half of all consumer spending, are driving this recovery, with their consumption patterns being highly correlated to asset market performance rather than broad-based sentiment indicators. June's retail sales data confirms this trend, marking a recovery from declines in April and May and coinciding with the first instance of positive goods inflation since 2023, signaling a potential end to the recent disinflationary period. The anticipated inflationary impact from upcoming tariffs on the EU and Japan is expected to be muted and delayed due to mitigating factors such as businesses front-loading imports and the likelihood that both exporters and importers will absorb a portion of the cost increases. The outlook remains constructive, contingent on the continued stability and performance of equity markets, but a significant downturn in asset prices represents the primary risk, as it would directly curtail spending from this key consumer segment and act as a leading recessionary indicator.

Key Decisions for Investors

• Consider maintaining exposure to consumer discretionary stocks, particularly those targeting high-end consumers, as their spending is closely tied to strong equity market performance and appears resilient to overstated tariff concerns.
• Monitor upcoming CPI and retail sales data closely to validate the thesis that tariff-related inflation remains contained and does not significantly derail the observed rebound in consumer spending.
• Implement risk management strategies for a potential correction in equity or housing markets, as a downturn would likely trigger a sharp pullback in spending from the top-decile consumers who are currently driving economic growth.