Cautious Consumers Push Discretionary Sector Profits Down to Lowest Levels Since 2020

Consumer Discretionary Giants Face Toughest Earnings in Years

Major consumer discretionary firms have just experienced their weakest earnings season in nearly six years, with persistent high costs, subdued consumer demand, and ongoing price pressures all taking a toll on their financial results.

Industry leaders such as Tesla, Ford, and Starbucks all reported earnings that fell short of analysts’ expectations.

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Bloomberg Intelligence reports that just 56% of S&P 500 consumer discretionary companies exceeded GAAP earnings forecasts in the fourth quarter, well below the 73% beat rate for the broader index and marking the lowest outperformance since early 2020.

Challenges Facing the Sector

According to Steven Shemesh, an equity analyst at RBC Capital Markets, consumers are being more selective with their spending as inflation persists, and tariffs are expected to further erode profit margins in the latter half of 2025.

Many companies have already exhausted straightforward cost-saving measures, such as workforce reductions and cutting transportation expenses, making it increasingly difficult to improve margins. Meanwhile, after years of rising bills, consumers may be reaching their limit, prompting some retailers to reduce prices to stimulate sales, Shemesh explained.

Chipotle Mexican Grill’s Chief Financial Officer, Adam Rymer, noted that the company’s restaurant margins have declined in part because they chose not to raise menu prices in line with inflation. He anticipates continued margin pressure in 2026, primarily due to this pricing strategy.

Big-Ticket Purchases and Consumer Behavior

Shemesh also pointed out that sales of expensive goods—such as vehicles and home renovations—are being hit hard by high interest rates, which make borrowing more costly. As a result, many consumers are reluctant to take on new debt, and delinquency rates, especially among younger and lower-income borrowers, have risen.

O’Reilly Automotive’s CEO, Brad Beckham, reported a decline in sales of do-it-yourself tools, particularly in non-essential categories like car appearance and accessories.

Lowe’s CEO Marvin Ellison remains cautious due to ongoing instability in the housing market. Similarly, Home Depot’s CFO Richard McPhail cited higher mortgage rates, fewer home sales, and concerns about employment and borrowing costs as factors dampening customer spending—a trend expected to persist this year.

Strained Consumer Spending

Uncertainty about job security and wage growth continues to challenge the sector. The US added only 181,000 jobs last year—the lowest non-recession figure since 2003. Wage increases have slowed, prices remain high, and fears about AI-driven job losses are growing. According to ZipRecruiter, more job seekers are now accepting lateral moves or even pay cuts.

Yung-Yu Ma, chief investment strategist at PNC Financial Services Group, told BNN Bloomberg that hiring trends resemble those seen in recessions, even though the economy isn’t technically in one. Workers with stable jobs are managing, but those seeking employment face tough conditions, which is likely causing consumers to hold back on spending.

Low-income families are feeling the pinch most acutely. The Economic Policy Institute found that real wages for lower-wage workers declined in 2025 after years of growth, a trend that could have broader economic consequences, according to EPI senior economist Elise Gould.

Executives echo these concerns. McDonald’s CEO Chris Kempczinski said the company continues to attract higher-income customers, but visits from lower-income consumers have dropped and are expected to remain under pressure.

Michael Linden, a senior policy fellow at the Washington Center for Equitable Growth, emphasized the importance of the labor market: “The labor market is the driving force of the US economy.” If hiring slows further or layoffs increase, both consumer spending and corporate earnings could face renewed challenges.

Looking Ahead to 2026

Analysts are adopting a more cautious outlook. As of February 20, the sector’s 12-month forward net revision momentum for earnings per share was -0.29, compared to 0.02 for the S&P 500, according to Bloomberg Intelligence—indicating more downward revisions than upgrades.

Shemesh noted that expectations for the quarter may have been overly optimistic, with some models assuming a stronger turnaround than current conditions support.

Justin Livengood, senior portfolio manager at Invesco’s US Growth Small and Mid-Cap team, suggested that tax refunds and potentially lower interest rates could boost consumer spending in the coming months. “Most consumers will receive larger refunds from the government over the next two months than usual,” he said.

There are still areas of resilience. Shemesh pointed out that auto-parts retailers like O’Reilly Automotive may fare better, as their products are often necessities. Some segments of the furniture market could also benefit as consumers replace items purchased during the pandemic.

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