Capital Ideas^™ 
Investment insights from Capital Group

As the U.S. economy heads into the final months of a tumultuous year, all eyes are on American consumers. Can they continue to power through despite weaker job growth and slower wage increases? Or will they tighten their purse strings amid rising tariffs and higher inflation?

Healthy earnings for several companies in the S&P 500 Index suggest the economy remains resilient. But there are signs that shoppers are being more selective about their purchases, and that many companies won’t be able to absorb tariff-related price hikes much longer.

U.S. second-quarter results shed light on how consumers are behaving and what they are buying. “It’s a dizzying mosaic of news, but corporate earnings can provide real-world insights into the progress of long-term investment themes,” says Hilda Applbaum, an equity portfolio manager for Capital Group Global Balanced Fund™ (Canada).

Below are three themes that warrant a closer look.

1. Consumers can likely absorb tariffs

U.S. shoppers may soon notice higher prices, but they’re better prepared than you might think. According to Applbaum, with favourable debt-to-income ratios and potential relief from tax refunds and rate cuts, many households could manage modest price increases.

As a result, major retailers are optimistic about their earning potential, despite the likelihood of price increases as actual tariff rates come into focus. Previously, many U.S. companies took the tariff hit themselves, rather than raise prices.

Walmart has already begun the adjustment process. Prices will increase as it “replenishes inventory at post-tariff price levels,” said Walmart CEO Doug McMillon.

Companies are expected to spread tariff-related costs between their supply chains and the consumer, Applbaum says. “Tariffs in the range of 10% to 15% generally mean a smaller portion will get passed to U.S. consumers.”

Despite the tumultuous rollout of U.S. tariffs, the federal government has experienced a sharp uptick in revenue. Measuring tariff revenue as a percentage of total import value helps determine its impact on various goods. Tariff revenue from consumer goods, for example, equaled 13.5% of the total import value for the month of June.

2. Homeowners could turn to remodeling

Will modest interest rate cuts prompt U.S. consumers to reenter the housing market? The question looms large over an industry mired in a prolonged sales slump.

Consumers are increasingly resigned to the idea that mortgage rates could fall but are unlikely to reach pandemic-era lows. The average 30-year mortgage rate sits at around 6.5% to 7%, well above the 3% to 4% that typically spurs a significant increase in home purchases. “We’re in an environment where homeowners have decided to focus on remodeling, but it’s early days still,” Applbaum explains.

Lower rates could further boost renovations and remodeling (R&R) and existing home purchases. In general, Home Depot should benefit from R&R and purchases of older homes that require work. “Alternatively, if buyers gravitate to newly built homes, it could be less beneficial for Home Depot’s earning potential.”

Outside of housing, U.S. AI infrastructure buildout may continue to support the broader construction industry. “Companies investing in data centres and utilities have ample cash and aren’t reliant on the interest rate environment,” Applbaum adds.

3. Tariffs scramble playbook for consumer brands

From tariffs to evolving consumer preferences to more frequent weather-related disruptions, companies are navigating tremendous volatility. Some are leveraging their strengths while others are suffering from their unique vulnerabilities.

In beverages, for example, both Coca-Cola and Pepsi face aluminum tariffs. Pepsi, however, sources its concentrate in Ireland, whereas Coke produces in the U.S. The additional tariffs Pepsi faced forced it to increase prices to help preserve margins. Equity investment analyst Beth Schulte notes this gives Coke flexibility to raise prices to align with Pepsi or stay put to gain additional market share. Either way, Coke’s business model is better positioned for tariffs, she adds.

This doesn’t mean all U.S.-based companies that manufacture overseas are disadvantaged. Cosmetic brand e.l.f. Beauty, for example, makes 75% of its products in China. Despite facing significantly higher tariffs, e.l.f’s business model of low-priced, on-trend and innovative products allow it to pass along price increases to consumers. The company’s average selling price is about US$6.50 per product, well below the industry average of US$9.50, according to its most recent annual report. E.l.f. and other beauty companies like Ulta that serve value-oriented consumers may see them switching from prestige to mass products. “Consumers are hunting for value across retail with purchases of larger sizes at Costco, or trading down to Walmart private labels,” Schulte explains.

A trend toward health and wellness, attributed in part to the popularity of weight loss drugs, has also impacted U.S. consumer behaviour. Ultra-processed, carb-centric and high-caloric foods are being replaced with high-protein, clean ingredient products, as well as cooking from scratch. “Traditional food companies are struggling as they haven’t kept pace with consumer needs. It will take more than louder commercials and heavier discounting to drive volume growth in food brands like Twinkies and Kool-Aid,” Schulte says.

Pressure isn’t all self-induced, as weather is becoming a challenging factor for some. Cocoa and coffee prices are abnormally high as inclement weather has impacted supply, even before tariff-related pressure. Weather affects consumers as well. A heat wave in Europe this summer curbed demand for chocolate, according to snack maker Mondelēz International. Interestingly, those same Europeans who avoided melting chocolate bars ended up buying more cold beverages. Coke reported they had a better-than-expected summer thanks to the hot weather. “We don’t know when an exogenous weather event will strike, and we can’t invest around temporary disruption. But overall volatility is on the rise, and companies need to plan conservatively and build redundancy into their business models,” Schultz notes.

Can companies adapt to a more cautious consumer?

Consumer behaviour is art, not science. Over the past few years, shoppers have defied expectations and opened their wallets amid soaring inflation, high interest rates and economic fluctuations. Whether that behaviour holds as tariffs dent their purchasing power will be closely followed, especially as the holiday season draws closer.

Applbaum believes rate cuts and next year’s tax returns could help offset some tariff-related cost increases and prevent an economic downturn. “I don’t make investment decisions based on a single quarter, but recent earnings serve as a useful checkpoint for how U.S. consumers and companies are responding to tariffs and other policy uncertainties.”