Research and Active Engagement: Whither the consumer?

This article is an extract from our Q3 2025 Active Fixed Income outlook.

The past: What just happened?

Investors largely looked through first-quarter global consumer earnings, focusing instead on forward guidance, margin expectations and consumer health, as the reporting season coincided with volatile tariff headlines.

Companies broadly noted that US consumers remain under pressure, Chinese consumer spending recovery is stalled and European consumers held up better on a relative basis — mainly due to easier year-over-year comparisons. Firms cited several headwinds during the quarter: cumulative inflation over the last several years, higher interest rates, equity market volatility, unfavourable weather and tariff uncertainty. These dynamics aligned with a sharp decline in sentiment since the beginning of the year.

The present: Tightened belts? 

While companies are not yet counting out the US consumer, recent behaviour shows rising price sensitivity, value-seeking and a shift toward needs-based spending. In packaged food, this has translated into weak volumes, heavier promotions and private-label share gains.

Consumer product firms also flagged retailer de-stocking as a headwind, with inventory management and working capital control taking precedence. At the point of sale, consumers are shopping more frequently with smaller baskets, focused on immediacy—yet still responsive to value and newness. Channel dynamics are shifting in favour of online, big-box, and club retailers, while drug and convenience channels lag. April and May commentary suggests modest improvement, as higher frequency sentiment indicators stabilised.

Outlook

Guidance varied as companies responded to a fluid tariff environment. Procter & Gamble and Kimberly-Clark, for example, lowered forecasts due to input cost pressures but offered some margin visibility. Sysco and Kraft Heinz also cut expectations due to weaker demand expectation that were not explicitly linked to tariff.

Meanwhile, Hasbro, Mondelez and O’Reilly maintained guidance on an ex-tariff basis, while more discretionary companies with greater sensitivity to demand and higher costs withdrew guidance entirely. Most companies are avoiding aggressive inventory pull-forward but are maintaining flexibility. Given the current pause for a portion of tariffs, we could see some incremental inventory build. Supply chain diversification remains a focus – Home Depot, for example, plans to ensure no single country accounts for more than 10% of inventory within 12 months. Price increases are expected to be surgical, balancing margin needs with demand sensitivity.

What could go wrong?

Despite de-escalated tariff risks in recent weeks, expectations for a second-half rebound may prove optimistic. Many companies are still forecasting margin recovery and demand acceleration, but these assumptions may be fragile.

Key risks include prolonged consumer strain, ongoing tariff volatility and declining pricing power amid inflation fatigue. Should tariffs further impact input costs or squeeze disposable income, consumption could slow more meaningfully. If topline assumptions fail to improve, the current guidance trajectory may require a reset lower particularly as we head into the all-important back-to-school and holiday spending seasons.

This article is an extract from our Q3 2025 Active Fixed Income outlook.