Wall Street Turns Its Back On Consumer Stocks As Fuel Costs Soar And Yields Surge

US gasoline prices near $4.44 a gallon at the pump, record diesel prices of $6.40 a gallon, and the Federal Reserve's interest-rate hike this week, its first since July 2023, are compounding pressure on household budgets and borrowing costs. Against that troubling backdrop, UBS warns that Wall Street is "turning more skeptical on consumer recovery."

UBS equity trader Mark Paski wrote in a note to clients on Wednesday about the gloomy environment for consumers that has placed renewed selling pressure on consumer stocks as Wall Street grows increasingly skeptical of a second-half earnings recovery, with recent management commentary pointing to persistent cost pressures and limited evidence of a meaningful rebound in demand.

"While part of the recent weakness can be attributed to higher crude prices and rates, the sharp sell-off across apparel, retail and restaurant names suggests investors are looking beyond those factors. Feedback from the conference circuit pointed to a common theme: persistent macro uncertainty, ongoing cost pressures and little evidence of a near-term demand inflection. Management teams broadly flagged pressure from inflation, transportation costs, fuel prices and cautious consumer behavior, reinforcing the view that earnings recovery may take longer than previously expected," Paski said.

He noted that consumer companies' share of S&P market capitalization has tumbled to just 13.5%, a record low, from about 31% in 1992. That decline shows the sector is becoming less relevant to investors.

S&P restaurant stocks are weakening more sharply than the broader consumer discretionary sector, signaling this growing concern ahead of midterm elections.

The hoped-for consumer rebound in the second half is running into a familiar problem: businesses face rising costs while customers remain reluctant to spend.

Speaking at Goldman Sachs' 33rd Annual Global Retailing Conference on Tuesday morning, Dollar General CEO Todd Vasos offered a downbeat assessment of its customer base, warning that "even that middle to upper middle is acting more like a lower income shopper these days."

At the start of the week, Jefferies food analyst Scott Marks flagged new pressure on convenience store customers as gasoline and diesel prices soared in August.

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