As the US 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 the 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 will not be able to absorb tariff-related price hikes much longer.

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. 

Below are three themes that warrant a closer look.

Analysts raised earnings expectations for 2025

Year-over-year earnings growth estimates for the S&P 500 Index (%)

Sources: Capital Group, FactSet. As of 28 August 2025. Earnings growth estimates aggregated by FactSet from sell side research analysts.

Consumers can likely absorb tariffs

Shoppers may soon notice higher prices, but they are better prepared than you might think. According to Applbaum, with low debt to income 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 earnings potential despite the likelihood of price increases as actual tariff rates come into focus. Previously, many US 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 cost 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 consumers.”

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

Higher tariffs could soon flow to consumers

Effective US tariff rates in 2025

Sources: Capital Group, US International Trade Commission, Peterson Institute for International Economics. As of 30 June 2025

Homeowners could turn to remodeling

Will modest interest rate cuts prompt 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 uptick in home purchases. “We’re in an environment where homeowners have decided to remodel their homes instead, 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 earnings potential.”

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

Homeowners locked into lower rates may turn to remodeling

Outstanding US mortgages by interest rate

Sources: Capital Group, FHFA, National Mortgage Database. Interest rate share as of 31 March 2025. Current 30yr fixed mortgage rate as of 28 August 2025.

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 aluminium tariffs. Pepsi, however, sources its concentrate in Ireland, whereas Coke, produces in the US. 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 either 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 does not mean all companies that manufacture overseas are disadvantaged. Cosmetic brand e.l.f, 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 $6.50 per product, well below the industry average of $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 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 is not all self-induced, however. 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. Coca-Cola 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 fluctuation. 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 the recent earnings served as a useful checkpoint for how consumers and companies are responding to tariffs and other policy uncertainties.”