By Teresa Rivas

Consumers can only take so many years of higher prices and stretched wallets. Wall Street is starting to worry that shoppers might finally be hitting their limit.

Hotter-than-expected inflation only adds that concern. Stocks broadly fell Wednesday after data showed price growth hit 3% in January for the first time in seven months.

Because Americans' spending is the main driver of the economy, a weaker U.S. consumer would be worrisome for investors across the board. But of course, retail and consumer staples stocks are the most vulnerable.

Investors also seem to be getting nervous, too: While the S&P 500 has gained nearly 2% year to date, the SPDR S&P Retail exchange-traded fund is down by an identical amount.

In recent years, a rising stock market, increasing personal savings, and a strong job market have helped consumers cope with rising prices. Even as inflation has remained stubbornly above the Federal Reserve's 2% target, the U.S. economy has seen strong retail sales, including a robust 2024 holiday season.

But now some analysts are warning that the retail landscape looks much more uncertain in 2025, especially with so many variables out of Washington.

President Donald Trump's tariffs policy remains a moving target, but higher levies on imports from China and elsewhere would likely boost consumer prices. In addition, higher deportation rates could lead to worker shortages that could lift labor costs.

Tax rates are in question as well. A number of provisions that have been in place, including the current standard deduction levels, from the Tax Cuts and Jobs Act (TCJA) are set to expire this year. Likewise, the government's current funding only runs through March 14. That means the " debt ceiling is a huge issue" that could soon dominate headlines once again, Washington Research Group's Chris Krueger noted in a recent podcast with TD Cowen.

Putting aside inflationary pressures, there are stock-specific risks to consider as well. Jefferies noted last week that inventories are rising for the first time in two years and may outstrip sales. The last time that happened, it wreaked havoc with retail sector guidance and margins.

On Wednesday, Jefferies analyst Randal Konik reiterated his concern that a strengthening U.S. dollar is a headwind for consumer discretionary companies with international exposure. It's particularly worrying when the industry as a whole is facing tough year-over-year comparisons to 2024, when the calendar provided an extra week of sales.

Malls could also see fewer customers, Konik says, citing slowing December mall traffic, according to Jefferies data. Mall traffic has been stronger than average since the end of the pandemic; but it could be reverting to the average, the firm says. Fewer shoppers in malls would be part and parcel with consumers being more price-sensitive.

"Although metrics point to general consumer health, consumers remain selective in their spending behavior," Konik writes. He cited a recent Synchrony Financial survey that highlighted consumers' prioritizing non-discretionary items and pulling back on nonessential big-ticket spending.

"Company pricing power has begun to erode after years" of higher prices, he added.

That dovetails with other analysts' concerns. TD Cowen's Max Rakhlenko has been cautious in his near-term outlook for more expensive products, like furniture and auto parts.

From a technical standpoint, BTIG's Jonathan Krinsky notes another concerning signal: The recent weakness in discretionary stocks has occurred as consumer staples stocks have "perked up."

"Typically the discretionary-versus-staples ratio is one of the better tells for health of the consumer," he writes. "If we start seeing this ratio move more in favor of staples, particularly on an equal-weighted basis, that would be more cause for concern."

Retail sales on Friday will provide the next data point on consumer health, although they might not be very robust, warns Bank of America's Aditya Bhave. That firm's card data showed spending per household was down 0.4% month-over-month in January on a seasonally adjusted basis. Any stockpiling of items, like clothing, ahead of tariffs could also lead to slower sales in those categories going forward, BofA noted.

Nonetheless, there's no need to panic yet.

With Republicans in positions of power, there's reason to believe there will be extensions of the current TCJA tax provisions. Secondly, some of the weakness in demand for bigger-ticket items doesn't seem to have trickled down to other items. TD Cowen analyst John Kernan highlighted weekly retail sales figures that are above 25-year trend lines -- continuing the holiday season's strength in discretionary spending -- and improvement in credit delinquencies along with a still strong job market.

"I see a strong overall consumer right now," Kernan says. "The bigger picture view on the consumer has to stay positive here."

BofA, too, thinks the January spending data is "a blip, not a turning point" -- arguing that last month's wildfires and snowstorms likely drove much of the drop. And with strong household balance sheets and a solid job market, the recent data, at worst, indicate "a rotation from goods to services, rather than an outright slowdown," Bhave says.

Even Jefferies doesn't think investors have to avoid discretionary stocks altogether. The firm recommends defensive and fundamentally stable companies with ample cash generation and catalysts ahead, such as Planet Fitness, TKO Group, and SharkNinja.

After years of shoppers' unexpected resilience under pressure, it doesn't hurt to be cautious about the outlook for consumer spending, especially with so much uncertainty ahead. Still, Americans' ability to keep spending has surprised experts repeatedly in recent years. Don't give up on them just yet.

Write to Teresa Rivas at teresa.rivas@barrons.com

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February 12, 2025 14:32 ET (19:32 GMT)

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