Reversal of Risk Appetite: Why Slowing Credit-Card Spending Signals a Shift in Consumer and Investor Behavior

Hey, investors. Let's talk about the elephant in the room: the quiet but seismic shift in consumer behavior that's reshaping the market. Credit card spending, a barometer of economic health, is telling us something critical. While balances grew 4.5% year-over-year in Q2 2025, hitting $1.09 trillion, the real story lies in the how and why behind the numbers. Consumers aren't splurging on luxury goods or big-ticket items—they're tightening their belts. Delinquency rates have dropped 9 basis points, but that's not because they're flush with cash. It's because they're prioritizing essentials. And that's a red flag for risk-on strategies.

The Macro Picture: A Consumer Economy in Retreat

The data paints a clear picture: the U.S. consumer is slowing down. Real personal consumption expenditures (PCE) in Q1 2025 rose just 1.2%, a stark drop from the 4% growth in the previous quarter. Durable goods spending plummeted 3.8%, dragged down by falling demand for cars and appliances. Why? Inflation expectations have spiked to 5.1% for the next year, and tariffs are squeezing margins. The University of Michigan's consumer sentiment index has fallen 18.2% since December 2024, and the Present Situation Index is at 131.5—still below the 80 threshold that signals recession risk.

This isn't just about tighter belts. It's about a fundamental shift in priorities. Consumers are trading down from discretionary to defensive spending. The Morningstar US Consumer Cyclical Index has underperformed the broader market by nearly 5 percentage points since January 2025. Meanwhile, defensive sectors like utilities, healthcare, and consumer staples are thriving.

The Investor Response: From Risk-On to Risk-Off

The market is already reacting. Investors are fleeing high-growth, discretionary sectors and piling into defensive plays. Take Tesla, for example. Its stock has fallen over 16% in 2025 as demand for EVs slows and tariffs hit margins. contrasts sharply with the resilience of Walmart and Costco, which have seen steady inflows as shoppers prioritize groceries and household goods.

The Federal Reserve's policy path isn't helping. With the 10-year Treasury yield near 4.6%, fixed income is suddenly more attractive than equities. Defensive sectors, with their predictable cash flows and low volatility, are the new darlings. And let's not forget the looming rate cut in September—investors are hedging against a potential Fed pivot, favoring sectors that can weather both high and low-rate environments.

Defensive Sectors: Where to Play in a Softening Economy

So, where should you be allocating capital? Let's break it down:

1. Utilities (XLU): This sector is a goldmine in a high-rate world. With surging demand for electricity from AI data centers and manufacturing reshoring, utilities are locking in long-term power purchase agreements. The Trump administration's push to quadruple nuclear energy capacity by 2050 adds a policy tailwind. Utilities are trading at a 17% discount to the S&P 500 on a forward P/E basis——making them a compelling value play.

2. Insurance (KIE): Insurers are thriving in this environment. They've got pricing power to pass on inflationary costs, and annuity sales are booming as investors seek guaranteed income. Life insurers are also benefiting from higher interest rates, which boost returns on their investment portfolios. The insurance sector's forward P/E is in the bottom quintile relative to the market——offering a rare combination of quality and affordability.

3. Aerospace & Defense (XAR): Global defense spending is surging. The U.S. is pushing for a 13% budget increase, and NATO allies are raising their contributions. With geopolitical tensions heating up, defense contractors are in a sweet spot. The sector has outperformed the market by 17% year-to-date——and its valuations remain attractive.

The Bottom Line: Adapt or Be Left Behind

The message is clear: the U.S. consumer is shifting from “spend now” to “save and survive.” Investors who cling to high-growth, discretionary plays are setting themselves up for disappointment. The smart money is moving into sectors that offer stability, pricing power, and long-term growth.

So, what's your move? Trim your exposure to Tesla, Chipotle, and other cyclical names. Reallocate to utilities, insurance, and defense. And keep a close eye on the Consumer Confidence Index—once it cracks 80, we'll know the tide has turned. Until then, play defense.

In a world where uncertainty reigns, defensive positioning isn't just prudent—it's essential. The market's next move will be dictated by how quickly consumers adapt to higher prices and tighter credit. For now, the playbook is simple: protect your downside, capitalize on resilient sectors, and stay nimble.

Final Call to Action:
- Buy: XLU, KIE, XAR
- Sell: TSLA, CMG, other high-beta discretionary stocks
- Watch: Consumer Confidence Index and Fed policy signals

The reversal of risk appetite isn't a blip—it's a trend. Don't fight it. Ride it.