It's been "another year of curveballs for the consumer," as William Blair analysts put it. That doesn't mean investors should avoid consumer stocks altogether.
Avoiding the sector entirely has been a popular strategy lately; the consumer discretionary sector is the worst-performing sector so far in 2026, after what was supposed to be the year of the consumer quickly fizzled in the face of higher gas prices. The State Street Consumer Discretionary Select Sector SPDR exchange-traded fund is down more than 3% year to date, compared with the S&P 500's almost 10% gain.
That's an overly simplistic view, argues analyst Sharon Zackfia and her team.
"The U.S. consumer is still set up relatively well with full employment and widespread market participation; the percentage of households that own U.S. equities and/or bonds is approaching 60%, from closer to 50% in 2000," she writes in a Tuesday note.
She is, however, concerned about inflation. Higher energy prices have pushed real wages lower since the spring, and "despite a strong employment environment, consumers have been drawing down heavily against savings since early 2025, implying increasingly less spending power," she notes.
Wealth concentration -- Zackfia cites the statistic that the top 20% of households by income now account for about 60% of consumer spending -- means that the richest Americans are holding up much better than the increasingly squeezed lower-income cohorts. Even so, consumers across income levels remain sensitive to price.
Americans are well aware of inflation's corrosive power on their pocketbooks, so it's no surprise that the strongest-performing brands have often been those that have increased their prices the least since 2019. Zackfia cites Cava among restaurants, Casey's General Stores among convenience stores, and Wayfair among furniture retailers.
"Ultimately, we believe the larger issue facing consumers is not gas prices, but broader sustained outsized inflation that has built up over the last five years," she writes. "Compounding matters, some discretionary categories like apparel and furniture have historically had no pricing power," as evidenced by the fact that prices for these goods haven't risen significantly in recent years.
Yet Walmart's recent announcement that it is lowering grocery prices shows consumers have a breaking point. That pressure could eventually spread to essentials such as food, where prices have climbed sharply. "There are signs that demand is starting to weaken, suggesting pricing from here is harder won."
That could be a problem for producers and retailers, given that costs are going up for everything from shipping to resin and plastics.
Given all these factors, Zackfia thinks investors should look for consumer companies with the best earnings visibility. Those include Casey's, Cava, Costco Wholesale, Dutch Bros., Freshpet, OneSpaWorld Holdings, O'Reilly Automotive, Primo Brands, Ross Stores, SharkNinja, Somnigroup International, TJX Cos., The RealReal, and ThredUp.
Many of those also appear on her list of top stocks for the remainder of the year, which she divides into offensive and defensive picks. The offensive names offer greater earnings and valuation upside if consumer sentiment proves stronger than expected, while the defensive group consists of more traditional, high-visibility companies.
Her offensive picks are Arhaus, Cava, Carvana, e.l.f. Beauty, Freshpet, On Holding, Somnigroup, and ThredUp, while her defensive favorites are Boot Barn Holdings, Casey's, Church & Dwight, Costco, Dutch Bros., OneSpaWorld, Ross, Scotts Miracle-Gro Company, and The RealReal.
It's still tough out there for retailers, but investors don't have to write off the whole mall.
Write to Teresa Rivas at teresa.rivas@barrons.com
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(END) Dow Jones Newswires
July 14, 2026 15:03 ET (19:03 GMT)
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