Resilient Consumer Spending Amid Tariff Pressures: Navigating Retail and Inflation-Linked Opportunities

The U.S. consumer, long the engine of economic growth, faces a paradox in 2025. Persistent inflation, averaging 3%, and a surge in tariffs—pushing the average effective rate to 22.5%, the highest since 1909—have eroded disposable income by $3,800 per household annually. Yet, consumer spending remains remarkably resilient, driven by ecosystem-driven innovations in retail and technology. This resilience, however, is unevenly distributed across income groups and sectors, creating both challenges and opportunities for investors.

The Macroeconomic Tightrope

Tariffs and inflation have reshaped consumer behavior. The average household now spends 2.3% more, but this burden is disproportionately borne by lower-income groups, who face a 2.5x higher tariff impact than the top decile. Despite these pressures, spending has not collapsed. Instead, consumers are adapting: 75% report trading down to lower-priced brands, while 54% have increased purchases of private-label products. Retailers like Walmart and Costco, whose private-label brands now account for 25% of sales, have capitalized on this shift. By 2026, this share is projected to rise to 30%, underscoring the growing importance of value-driven alternatives.

Artificial intelligence and omnichannel strategies are further sustaining spending. AI-driven pricing models, inventory optimization, and personalized recommendations reduce price sensitivity, while same-day delivery and curbside pickup enhance convenience. Sustainability is also a strategic lever: 50% of consumers now consider the environmental impact of returns, prompting retailers to adopt eco-friendly policies that cut costs and align with values.

Generational and Income-Level Divergence

Consumer behavior varies sharply by age and income. Gen Z and millennials are more likely to purchase secondhand items or delay discretionary purchases, while baby boomers stick to traditional habits. Lower-income households, 51% of whom reduced meat and dairy purchases due to soaring prices, are more inclined to switch to private-label brands. In contrast, high-income consumers, less affected by tariffs, continue to splurge on travel and luxury goods, with 4.7% real spending growth in 2025.

This divergence has implications for retail strategies. For instance, “buy now, pay later” (BNPL) platforms like Affirm and Klarna are critical for middle- and lower-income households, enabling them to maintain purchasing power. Meanwhile, high-end retailers must focus on premium experiences to retain affluent customers.

Investment Opportunities in a Shifting Landscape

The retail and consumer discretionary sectors are navigating a complex environment. While tariffs and inflation pose headwinds, certain stocks are well-positioned to thrive. Here are three undervalued names with strong fundamentals:

1. Chagee Holdings Limited (CHG)
2. Market Cap: $4.05 billion
3. Discount to Fair Value: 43%
4. Earnings Growth: Net income rose 14% year-over-year, with revenue up 33%. Analysts project 29% annual growth over the next three years.

5. Resilience: Diversified international operations and a focus on teahouse services provide stability amid trade policy shocks.

6. DLocal Limited (DLO)

7. Market Cap: $2.96 billion
8. Discount to Fair Value: 10.8%
9. Earnings Growth: Q1 net income surged 162% year-over-year. Strategic hires, such as Will Pruett, aim to enhance scalability.

10. Resilience: A global payment processing platform insulates it from regional trade disruptions.

11. StoneCo Ltd. (STNE)

12. Market Cap: $3.64 billion
13. Discount to Fair Value: 49.7%
14. Earnings Growth: Q2 revenue grew 32%, with net income doubling. Exclusion from Russell indices creates a valuation gap.
15. Resilience: Strong growth in Brazil's financial services sector and a robust balance sheet.

The Path Forward

The sustainability of consumer-driven growth hinges on adaptability. Retailers that leverage AI, omnichannel logistics, and private-label innovation are best positioned to weather inflationary and trade policy shocks. For investors, the key is to focus on companies that are not merely surviving but redefining the new economic normal.

While the Federal Reserve remains cautious about inflation, the U.S. economy has so far avoided a recession. However, the full impact of tariffs may not materialize until late 2025. In this environment, undervalued stocks with strong balance sheets and growth potential—such as CHG, DLO, and STNE—offer compelling opportunities.

In conclusion, the resilience of U.S. consumer spending is not a passive outcome but a result of strategic innovation and behavioral shifts. For those willing to look beyond short-term volatility, the retail and consumer discretionary sectors hold the promise of long-term value.