The Growing Divide Between Consumer Sentiment and Spending: What It Means for 2026 Market Volatility

The U.S. consumer landscape in 2025 has been defined by a stark divergence between sentiment and spending. While the University of Michigan's Consumer Sentiment Index fell by over 30% since December 2024, high-income households have defied the trend, maintaining optimism and driving discretionary spending in sectors like travel, dining, and luxury hospitality. This divergence has created a fragile equilibrium, with the top 10% of earners now accounting for nearly half of all U.S. consumer spending-the highest share since 1989 according to analysis. However, as macroeconomic headwinds intensify and credit risks rise, investors must reassess the sustainability of this consumption pattern and its implications for equities and volatility in 2026.

High-Income Consumers: A Double-Edged Sword

High-income households have become the linchpin of discretionary spending, with 76% of high-income Gen Z respondents planning to splurge on experiences like travel and dining, up ten percentage points from the previous quarter. This contrasts sharply with lower- and middle-income households, who have tightened budgets, prioritized essentials, and shifted to lower-cost retailers according to consumer data. The concentration of spending among the wealthy reflects a broader structural shift: the luxury market, projected to reach €1.44 trillion in 2025, is increasingly driven by experiential consumption rather than traditional goods like fashion or accessories.

Yet this trend is not without risks. Macroeconomic pressures-including inflation, geopolitical uncertainty, and looming U.S. tariffs-have dampened aspirational spending among even high-income consumers. For instance, price increases that fueled luxury sector growth from 2019 to 2023 have now plateaued, signaling a potential slowdown in demand. Meanwhile, the top 10% of earners, who now dominate consumer spending, could face a sudden shift in behavior if economic conditions deteriorate further.

Sectoral Divergence and Credit Risk

The growing reliance on high-income consumers has created a stark divide between luxury/discretionary equities and defensive sectors. Only 13% anticipate outperformance in 2026 compared to 79% who expect a market correction. Defensive sectors like Consumer Staples, Utilities, and Health Care-historically resilient during downturns-have gained favor due to stable cash flows. For example, during the 2008 financial crisis, defensive stocks like Campbell Soup and Coca-Cola outperformed the broader market, a pattern likely to repeat in 2026 amid rising inflation and trade tensions according to market analysis.

Credit risk assessments further underscore this divergence. Luxury brands reliant on volatile markets like China and Europe face heightened exposure to tariffs and shifting consumer preferences according to Morgan Stanley. Morgan Stanley warns that AI-driven debt issuance in the tech sector could exacerbate credit market pressures, while Schwab projects narrower corporate profit margins as companies grapple with high-tariff environments. For luxury equities, the risk is twofold: macroeconomic shocks and the erosion of brand relevance as consumers prioritize experiences over possessions according to research.

Hedging Against a Spending Slowdown

The case for hedging is compelling. Historical data shows that defensive sectors outperform during recessions, with Consumer Staples and Utilities averaging returns of 27.6% and 25.4% respectively during the 2020-2025 downturns according to LPL research. In contrast, Consumer Discretionary stocks saw a maximum return of 43.1% but also a steep -37.0% loss, highlighting their volatility. For 2026, Schwab and Natixis predict elevated market volatility driven by inflation and trade wars, with fixed income and defensive equities offering safer havens.

Investors should consider reducing exposure to luxury/discretionary stocks and increasing allocations to defensive sectors. This strategy aligns with the broader trend of "performance discipline" advocated by Bain & Company, which emphasizes efficiency and emotional value in a shifting consumer landscape. Additionally, hedging against credit risk-particularly in sectors with high debt issuance-will be critical as central banks implement rate cuts to counteract a weakening labor market.

Conclusion

The current divide between consumer sentiment and spending is a symptom of deeper structural imbalances. While high-income households have propped up discretionary spending, their behavior is increasingly vulnerable to macroeconomic shocks and shifting preferences. For investors, the path forward lies in hedging against a potential spending slowdown by prioritizing defensive sectors and reducing exposure to luxury equities. As 2026 looms, the key to navigating volatility will be adaptability-balancing growth opportunities with the resilience of essential consumption.