Consumers feel the pinch with surging prices

Investors are starting to worry about the impacts of lower consumer spending — as the US reported consumer spending falling 0.4% last week.

What’s the big deal? Companies have gotten away with price increases in the past year — but consumers may be reaching their limits.

As a result of inflation, over 50% of adults have already reduced spending. If inflation persists (CNBC Survey), consumers are expected to:

• Cut back on dining out (52%).
• Cut back on driving (42%).
• Cancel a trip or vacation (40%).

Additional expectations include subscription cancellation, switching to generic products and delaying the purchase of a car.

Market losing its support: Strong consumer spending had supported the bull market — but rising mortgage rates, surging energy prices and higher prices on just about everything else risk lower consumer spending.

The 2022 growth forecasts have fallen from 3.9% to 3.4% since the start of the year.

• 81% of adults think a recession is coming this year.
• Consumers are reducing debts instead of spending (BBG).

Market outlook: According to the Head of Equity Strategy of Saxo Bank, larger companies are more resilient to tighter financial conditions. Compared to smaller companies, they can pass on higher costs to consumers. (MW)

David Kostin of Goldman Sachs expects earnings weakness from consumer discretionary and consumer staples — industries that have seen their earnings forecast fall as inflation rose (BBG).

• The Consumer Discretionary Sector — which includes companies providing non-essential goods and services, performs worse during economic contractions.
• A decrease in spending could impact companies in the S&P 500 Consumer Discretionary Index, including Amazon, Home Depot, McDonald’s, Nike and Starbucks.

If you invest in companies that rely on strong consumer spending — might be time to take a deeper look.