Consumer Spending Shifts: Event Concentration, Inflation, and Sectoral Divergence

Key Quotes

"I mean, the consumer is definitely challenged. It's not as bad as people are saying, but it's definitely challenged. I mean, the University of Michigan sentiment readings last week, the second lowest reading on record. Corporates are definitely talking things down a little bit. We heard from some of the biggest consumer corporates in the world today, which have said that things have slowed into October. So, I don't think we're willing to say that the consumer is so bad into the holidays, but things are definitely more challenged than the last time we spoke."

Scott Filer acknowledges that consumer sentiment is challenged, citing low sentiment readings and corporate commentary indicating a slowdown into October. Filer suggests that while the situation is difficult, it is not as dire as some market perceptions might indicate, particularly concerning the upcoming holiday season.

"It's been challenged. Um, you know, last earnings season, things were really good. It was only low income companies that were talking things down. Now the weakness has definitely spread. We saw a couple of misses and cuts this morning from some big home improvement names. Um, we have a lot more companies to report the next few days. Some of them are going to be good, some of them are going to be bad. But one thing that we've learned is the weakness has spread beyond just the low income, up to the middle income consumer as well. That's what we're learning from corporates during earnings season."

Scott Filer explains that the recent earnings season has revealed a broadening weakness in consumer spending. Filer notes that unlike the previous season, where only low-income consumers were struggling, the current downturn now affects middle-income consumers as well, as evidenced by misses and cuts from major home improvement companies.

"I think it's going to be fine. Um, the consumer shows up for events. The consumer is going to show up for Black Friday. They're going to show up for the holidays. They're going to show up in 1H 2026 when there's more refund dollars and stimulus dollars. It's the in-between periods that have slowed more. Um, sort of the October time period that we're having now, it's a lower volume, non-event period. So that's why things are slow. I think next Friday, or ultimately, it's going to be just fine. We're going to get good reports on Black Friday. I just think the consumer is concentrating their spend more than ever on events. So a holiday will be fine. It's the in-between periods where we're a little bit more worried about."

Scott Filer expresses optimism for the upcoming holiday shopping season, particularly for Black Friday, attributing this confidence to the consumer's tendency to prioritize spending during specific events. Filer differentiates this by noting that the slowdown is more pronounced in the periods between these major shopping events, such as the current October period, which is characterized by lower volume and fewer promotional activities.

"If you would have asked me two or three months ago, I would have said no. The consumer was sort of absorbing those costs and spending just fine. What we've heard the last few weeks is we've heard from more companies that as they've begun to raise prices and push through pricing, especially in October, that you're beginning to see pushback from the consumer. It's happening in restaurants. It's not, it's happening in autos. Um, auto market, you know, aftermarket auto retail. So we're definitely beginning to hear about it more and more. I don't think the consumer is, you know, allergic to price increases, but they're definitely becoming a lot more picky than the last time we talked a few months ago."

Scott Filer indicates a shift in consumer behavior regarding price increases, noting that while consumers previously absorbed rising costs, recent feedback from companies suggests growing pushback. Filer points to sectors like restaurants and auto retail where price increases are now meeting more resistance, leading consumers to become more selective with their spending.

"It's, it's fading a little bit. Um, you know, before I used to think about the services and experiences trade through travel. Um, and right now that's beginning to slow a little bit as well. The cruise lines have talked about a little bit of pullback there as well. So I, I think it's beginning to converge a little bit. So with the consumers definitely slowed, as we've talked about a little bit, and it's happening on both the goods and the services front. Um, versus before services were good and goods were bad. It's beginning to converge and see a slowdown in both."

Scott Filer observes that the trend of consumers prioritizing services and experiences over goods is beginning to diminish. Filer notes a slowdown in travel-related spending, including a pullback from cruise lines, suggesting a convergence where both goods and services are now experiencing a deceleration in consumer demand.

"So I actually like consumer now. It's been such a massive underperformer. So much negativity is priced in. So I actually really like owning the consumer, um, into the year end. But I want to do it through defensive discretionary names. So off-price names, the auto retail names. Um, those names that's a discretionary purchase that are also a little bit defensive, that's the kind of names we want exposure to right now."

Scott Filer expresses a positive outlook on the consumer sector, viewing it as an underperformer with significant negativity already priced into its stocks. Filer recommends investing in "defensive discretionary" names, such as off-price retailers and auto parts stores, which represent discretionary purchases but possess defensive qualities.