The Deteriorating US Consumer Sentiment and Its Implications for Equities and Inflation-Linked Assets

The U.S. consumer sentiment index, a critical barometer for economic health, has plummeted to 58.2 in August 2025, marking a 14.3% year-over-year decline and the lowest level since early 2024 [1]. This deterioration reflects a confluence of factors: inflation expectations have surged to 4.8% for the next 12 months, while trade policy uncertainties—particularly tariffs on imported goods—have exacerbated consumer anxiety. The implications for equities in consumer-driven sectors and inflation-linked assets are profound, demanding a nuanced assessment of risks and opportunities.

The Dual Threat: Inflation and Tariffs

Rising inflation expectations are no longer confined to discretionary spending. Consumers now project annual inflation at 4.8%, up from 4.5% in July 2025, with essential goods like groceries and gasoline dominating concerns [1]. This shift has forced households to prioritize essentials over nonessentials, as evidenced by a 3.1% drop in the Consumer Expectations index [1]. Meanwhile, trade policy uncertainties have compounded the problem. The average effective U.S. tariff rate has climbed to 22.5%, the highest since 1909, with tariffs on Chinese goods alone reaching 60% [4]. These measures have raised consumer prices by 2.3% in the short term and eroded household purchasing power by $3,800 annually [1].

The automotive sector, for instance, faces a perfect storm. Tariffs of 25% on imported vehicles have slashed new car inventory priced under $30,000 from 38% in 2019 to 13.6% in 2025 [1]. Automakers like Ford and Kia are retaining aged inventory and reevaluating trade-in valuations, while consumers delay purchases of midrange vehicles [1]. Similarly, the retail sector—particularly apparel and textiles—has seen a 17% price surge due to tariffs, with department stores projected to lose 3% in sales volume [4].

Equity Risks: Discretionary Sectors Under Pressure

Consumer discretionary equities are particularly vulnerable. The University of Michigan’s data reveals a 5.7% monthly decline in the index, with purchasing intentions for big-ticket items like electronics and apparel falling sharply [1]. Deloitte’s 2025 Retail Industry Outlook warns that a broader economic slowdown triggered by tariffs could force the Federal Reserve to raise interest rates further, compounding the sector’s challenges [1]. For example, the Conference Board’s Consumer Confidence Index dropped to 97.4 in August 2025, with pessimism about job availability and income growth amplifying the risk of reduced discretionary spending [2].

Automotive and retail equities are not the only casualties. The hospitality sector, reliant on business travel and cross-border activity, has seen its growth projections slashed from 10.4% to 6.6% in 2025 due to trade tensions [5]. The Global Business Travel Association reports that 34% of buyers anticipate fewer business trips, while 48% of suppliers expect revenue declines in lodging [5]. These trends underscore the fragility of sectors dependent on consumer and corporate confidence.

Defensive Rebalancing: Opportunities in Inflation-Linked Assets

Amid this volatility, defensive allocations and inflation-linked assets are gaining traction. Treasury Inflation-Protected Securities (TIPS) now offer a real yield of 1.9% for five-year maturities, with breakeven inflation rates at 2.4% [1]. Portfolio managers are increasingly overweighting TIPS and gold to hedge against stagflation risks, while utilities and financials—less sensitive to macroeconomic shifts—are attracting capital [1]. JPMorgan Chase and Capital One, for instance, are leveraging digital transformation and disciplined lending to bolster resilience [1].

International equities and small-cap stocks also present opportunities. U.S. small-cap stocks, trading at a discount to large-cap counterparts, could benefit from potential tax reforms and deregulation [3]. Meanwhile, European and Japanese small-cap stocks offer diversification due to low correlation with U.S. markets [3]. These strategies align with Fidelity’s third-quarter 2025 outlook, which emphasizes capital preservation and short-duration bonds to navigate uncertainty [5].

Conclusion: Navigating the New Normal

The interplay of inflation, tariffs, and consumer sentiment has reshaped the investment landscape. While discretionary sectors face headwinds, defensive equities and inflation-linked assets offer a counterbalance. Investors must prioritize flexibility, reducing exposure to high-beta sectors and increasing allocations to TIPS, utilities, and international markets. As the Yale Budget Lab notes, the long-term GDP impact of tariffs could reduce growth by 0.6%, underscoring the need for proactive portfolio adjustments [4]. In this environment, prudence and diversification are not just strategies—they are imperatives.

**Source:[1] US Consumer Sentiment Declines on Dimmer Views of ... [https://www.bloomberg.com/news/articles/2025-08-29/us-consumer-sentiment-declines-on-dimmer-views-of-outlook][2] US Consumer Confidence [https://www.conference-board.org/topics/consumer-confidence/][3] Mid-Year Outlook: Broader Equity Horizons and Income ... [https://am.gs.com/en-lu/advisors/insights/article/2025/asset-management-mid-year-outlook-2025-equity-and-income][4] Where We Stand: The Fiscal, Economic and Distributional Effects of All US Tariffs Enacted in 2025 Through April [https://budgetlab.yale.edu/research/where-we-stand-fiscal-economic-and-distributional-effects-all-us-tariffs-enacted-2025-through-april][5] Economic outlook: Third quarter 2025 [https://www.fidelity.com/viewpoints/market-and-economic-insights/quarterly-market-update]