Global Equity Pulse: The Consumer Isn't Broken, Just Bruised

Consumer-related sectors face a mixed outlook for the rest of the year, with elevated employment levels helping mitigate the impact of higher gas prices. Market performance suggests that investors are increasingly worried about a slowdown, with consumer discretionary stocks down approximately 6% year to date through September 22, while the broader S&P 500 Index has gained more than 13%.

However, the underlying economic data tells a more balanced story. While certain parts of the consumer sector are clearly under pressure, overall spending remains surprisingly resilient. In this ever-shifting macro environment, we believe the best approach is to focus on high-quality companies that have sold off disproportionately and can grow through company-specific improvements.

Tailwinds: What's Supporting the Consumer?

Despite headwinds, several important factors should continue to support consumer spending. Most importantly, the labor market remains healthy. US unemployment sits near 4%, while broader measures of underemployment remain well below historical averages. Jobless claims also remain low, suggesting companies are not aggressively reducing headcount. Employment continues to be the foundation supporting consumer demand.

US Total Household Net Worth Reached a Record in 2Q26.

Source: Board of Governors of the Federal Reserve System (US), Households; Net Worth, Level [BOGZ1FL192090005Q], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL192090005Q, October 6, 2026.

Household balance sheets also remain strong overall. US household net worth reached a record US$185 trillion during the second quarter of 2026, providing a significant wealth cushion for many consumers. Spending data remains encouraging as well. Retail sales excluding autos and gasoline have continued to grow at roughly 5% to 6% year-over-year rates through the summer. Restaurant spending, online retail purchases, and many discretionary categories remain positive despite negative sentiment readings.

Retail Trade Is Strong

Source: U.S. Census Bureau, Advance Retail Sales: Retail Trade [RSXFS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RSXFS, October 6, 2026.

Opportunities in Consumer Discretionary

The recent weakness in consumer discretionary stocks creates opportunities in businesses where the market may be overly pessimistic. Rather than relying on a strong economic recovery, we focus on companies with resilient demand, improving operations or other self-help initiatives.

Within the sector, autos stand out to us as an area of opportunity. The industry is late-cycle, unpopular and facing numerous concerns. However, that pessimism has also created attractive valuations in select companies. Future returns are likely to come from company-specific execution, cost controls, capital returns and strategic improvements rather than strong industry growth.

For example, a large Japanese auto giant has remained highly profitable despite tariff and macroeconomic headwinds. The company's "multi-pathway" strategy, which includes hybrids, plug-in hybrids, battery electric vehicles and hydrogen technologies, gives it flexibility as global auto markets evolve.

Travel and luxury goods also continue to show resilience, supported by higher-income consumers who remain willing to spend on experiences and premium brands. One of our European luxury holdings has remained resilient even as China and aspirational luxury demand softened, positioning it to benefit disproportionately when global luxury spending eventually recovers. The stock remains well below its 2023 highs, but the underlying business continues to generate more than €80 billion in annual revenue with strong profitability and multiple growth drivers across fashion, beauty, jewelry, retail and travel-related spending.

Consumer Staples Offer Potential Stability

Consumer staples may not offer rapid growth, but fundamentals appear to be improving. Many companies have spent the past several years simplifying portfolios, improving productivity, reducing costs and strengthening execution. As a result, earnings quality is improving even as overall sector valuations have become more reasonable.

In an uncertain economy, these defensive characteristics are appealing. While finding strong growth stories can be challenging, select turnaround situations and companies with effective cost-control strategies appear well positioned.

For example, one of the largest US retailers is using artificial intelligence (AI) to analyze sales patterns, online searches, weather, economic trends and local demand signals to predict what products customers will buy and where they will buy them. These AI models help the company optimize inventory levels across stores, warehouses and fulfillment centers, reducing stock shortages, minimizing excess inventory, improving supply chain efficiency and ensuring products are available when customers need them.

Also in the sector, a leading European premium spirits company is employing a turnaround strategy focused on restoring growth and improving efficiency after several years of weak demand. Under a new CEO, it has launched a three-year plan to generate US$1 billion in additional cost savings through operating model redesign, supply-chain improvements, and the elimination of organizational duplication.

Wheat from Chaff: Stock Selection Is Key

Rather than signaling a broad consumer downturn, current conditions point to a more selective environment where winners and losers are becoming increasingly differentiated. In our view, this creates opportunities for active investors to focus on high-quality consumer businesses with strong brands, solid balance sheets and company-specific catalysts. While the path forward may be uneven, a bruised consumer is not the same as a broken one.

 

Market Review Global equities rose modestly in the third quarter, but the headlines hid sharp shifts in market leadership. US and Asia Pacific markets advanced, while Europe declined and emerging markets ended slightly lower. Japan was a key source of strength in Asia, as markets outside Japan slipped. At the global level, value outperformed growth, momentum fell sharply and large caps proved more resilient than small caps. This showed that gains were concentrated in larger, value-oriented companies rather than spread evenly across the market.

 

Outlook From our perspective, global equities remain attractive. Many stocks outside the largest US technology companies are still trading at reasonable prices despite solid business fundamentals. Markets such as Europe, Japan and parts of the emerging world offer companies with strong balance sheets, healthy cash flows and shareholder-friendly policies, often at lower valuations than their US counterparts. If interest rates move lower and economic growth remains steady, investors may begin looking beyond the market’s most expensive stocks, creating opportunities for undervalued companies to outperform. While short-term market swings are always possible, the combination of attractive valuations, improving earnings, and broader market participation supports a constructive outlook for global equities.