A resilient consumer isn’t an all-clear for investing in retailers and restaurants
Banking leaders appear to have reached a consensus: Despite a minefield of uncertainty this year, the U.S. consumer has remained surprisingly resilient. But the implication for stock pickers is far from clear. From President Donald Trump’s aggressive trade policy to the path of interest rates to a cooling labor market, the questions looming about the economy in 2025 are diverse. The ongoing government shutdown is the latest issue that presents risks to both the real economy and investors’ ability to understand what’s going on due to a lack of economic data collection. Despite everything, the banking world still paints a picture of an economy that has not yet cracked. Both credit and debit card spending at Wells Fargo are increasing “week over week” at Wells Fargo, CEO Charlie Scharf said Tuesday at the Economic Club of New York. “There’s an overall level of growth and spending that you’re seeing. Consumers are spending, but they’re not reducing their savings to do so. If you look at overall savings rates, you’ll see deposit balances increase a little bit,” Scharf said. “And they don’t do it at the expense of credit performance.” Earnings from the nation’s largest banks and credit card issuers, including Scharf’s own Wells Fargo, further bolstered that optimistic outlook last week. “The U.S. consumer and the overall macro economy have been quite resilient so far in 2025,” Capital One CEO Richard Fairbank said on Tuesday night’s earnings call. “The unemployment rate has increased slightly recently, but it is still quite low by historical standards.” While Fairbank added that “some consumers are feeling pressure from the cumulative effects of price inflation and higher interest rates,” this did not significantly hurt Capital One’s results. The company, one of the largest U.S. credit card issuers, posted a better-than-expected quarterly earnings report, supported by improvements in credit quality performance. As a result, Club reiterated its 1 buy-equivalent rating and maintained its $250 price target on the stock. “At a high level, the story we’re trying to tell is a story based on available facts,” Jeremy Barnum, CFO of JPMorgan Chase, the nation’s largest bank by assets, said on the firm’s earnings call last week. “And the current realities on the consumer side are that the consumer is resilient. Spending is strong and default rates are actually coming in below expectations. So those are facts that we really can’t escape.” These are facts that consumer-oriented stock investors like us cannot escape. Investors should be encouraged by the optimism of these financial managers, while recognizing that more understanding is needed before taking any action at the stock level. Jim Cramer has long believed that looking at stock selection only from top to bottom can be sheer folly. “You always hear that we miss the forest for the trees, but when stockpiling it’s equally important not to miss the trees for the forest,” Jim said. In practice, this means that investors must consider both the company’s fundamentals and the broader forces that may affect the entire industry. Take Costco for example. The club did not open positions just because of one trend. We think it is the best managed retailer in the world. Costco has an extremely loyal customer base due to both its affordable prices and membership model. This certainly helps in times of high inflation and tight budgets so that shareholders can rely on the mass retailer to gain traction among shoppers. It’s a similar story to TJX Companies. The company offers quality products at affordable price points to inflation-weary customers; A perfect combination regardless of economic conditions. Additionally, as a discount-price retailer, the parent company of Marshalls and HomeGoods is better equipped to navigate tariffs than its peers, which import most of their products directly. There’s more to consider at Nike than just high-end consumer spending patterns. In September, we launched into the global sportswear leader position due to a long-term turnaround story under CEO Elliott Hill. Nike was previously one of the best growth stories in decades, but past leaders’ decisions have caused shares to lag since late 2021. The same goes for Starbucks. The company’s ongoing rehabilitation under CEO Brian Niccol is the key reason we’ve kept it in stock for so long. Although our investment in Starbucks is based on Niccol’s art of transformation, the coffee chain — like all consumer-facing companies like restaurants and retailers — is not immune to what’s happening in the economy. The situation with restaurant stocks in particular exemplifies the shortcomings of a purely top-down perspective. In a note to clients on Tuesday, analysts at Morgan Stanley cited the weak performance in restaurant stocks since last earnings season, saying demand indicators in September have “decelerated noticeably” and sentiment around the group remains “weak in the near term.” “We don’t have a clear explanation for downshifting from August to September, but there’s a possibility that the summer may have distorted reality a bit. This has raised questions about restaurants as a leading indicator of consumer pullback,” the analysts wrote. “We don’t want to jump to that conclusion, and it hasn’t been readily apparent in the past, but realistically, the companies that say ‘things are OK’ are often the ones that either bought shares or were exposed to high levels of risk when things were looking really good.” Analysts also noted that inflation in the coverage universe has been “modest so far,” unless a company sells beef or coffee. This is where the Club name Texas Roadhouse comes into play. While it’s seen as a budget-friendly dinner for consumers, investors are worried that beef inflation could pressure its margins and make the stock a tough sell this year, even if it ticks other boxes of our investment thesis. Like the rest of our portfolio, we’ll be analyzing Texas Roadhouse’s quarterly earnings report, due on November 6, for further guidance on what to do next with the stock. (See here for a complete list of stocks in Jim Cramer’s Charitable Trust.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT GUARANTEE IS MADE.
