Spotting Contrarian Value in US Consumer Sentiment: Overweight Cyclicals, Underweight Treasuries

The June 2025 RCM/TIPP Consumer Sentiment data offers a puzzle: broad pessimism persists, yet key sub-components suggest improving momentum in economic and personal outlooks. For investors, this divergence creates a contrarian opportunity. While the RealClearMarkets/TIPP Economic Optimism Index remains in pessimistic territory at 49.2, the nuances in its sub-components and demographic trends hint at a recovery that markets may have overlooked. This sets the stage for a tactical shift toward cyclical equities and away from Treasury bonds, as the data points to a fragile but real upturn in consumer confidence that could outpace bond market skepticism.

The Nuances in the Data: Pessimism, But with a Silver Lining

The headline index's 2.7% monthly rise to 49.2—its highest since March—masks deeper optimism in two critical areas:
1. Six-Month Economic Outlook improved by 3.4% to 45.1, its strongest reading since early 2024.
2. Personal Financial Outlook rose to 53.8, maintaining optimism (above 50) for the fourth consecutive month.

While these gains remain modest, they reflect a shift from the extreme pessimism of early 2025. The key driver? A partial pause in U.S. tariffs on Chinese goods, which survey director John Tamny links to reduced export bottlenecks and improved consumer sentiment. Even as confidence in federal policies (48.6) remains stuck in pessimistic territory, the broader economy's outlook is stabilizing—a contrast markets may not yet price in.

Demographic Divergence: Where the Recovery Is Hiding

The data reveals a striking split: 18 of 21 demographic groups improved in June, including 7 groups surpassing the neutral 50 threshold. Notably, the Personal Financial Outlook component saw 13 of 21 groups in positive territory, suggesting households are cautiously optimistic about their own financial trajectories despite broader economic gloom.

This divergence is critical for investors. If specific demographics (e.g., younger workers, suburban households) are leading the recovery, sectors tied to discretionary spending—like retail, autos, and travel—could outperform. Meanwhile, the Financial-Related Stress Index's 5.5% drop to 63.0 hints at reduced pressure on consumer budgets, potentially unlocking spending power.

Inflation Eases, but Policy Risks Linger

Year-ahead inflation expectations plummeted to 5% in June, down from 6.6% in May—the fastest decline since 2021. This easing reduces immediate pressure on the Federal Reserve to tighten further, though long-run expectations remain elevated at 4%. The Fed's next move hinges on whether inflation trends toward 2% or stalls near 4%.

For fixed income investors, this creates a dilemma: Treasuries have rallied on recession fears, but a 4% inflation environment would eventually erode real yields. The RCM/TIPP data's persistent tariff concerns and Middle East risks add geopolitical volatility, making Treasuries a poor hedge against inflation surprises.

The Contrarian Play: Overweight Cyclicals, Underweight Treasuries

1. Cyclical Equities:
2. Why? Improving consumer confidence in spending and personal finances bodes well for sectors like retail (e.g., Walmart, Target), autos (Ford, Tesla), and industrials (Caterpillar).
3. Risk: If the Fed raises rates again, borrowing costs could dampen spending. However, the June inflation drop reduces this risk.

4. Trade: Overweight the S&P 500 Consumer Discretionary sector and cyclically sensitive industrials.

5. Underweight Treasuries:

6. Why? Bond markets are pricing in recession risks, but the RCM/TIPP data's sub-components suggest a soft landing is more likely. Treasuries offer poor compensation for inflation risk.
7. Trade: Reduce exposure to long-duration bonds and consider floating-rate notes or inflation-linked securities.

Risks to the Thesis

• Tariff Reinstatement: If tariffs resume, consumer and business costs could spike, reversing recent gains.
• Geopolitical Shocks: Middle East tensions or a new inflation surprise could reignite pessimism.

Conclusion

The June RCM/TIPP data paints a picture of a consumer base that's cautiously optimistic about its own finances and the near-term economy, even as it distrusts policymakers. This divergence creates a contrarian edge: investors who bet on improving cyclical demand while hedging against policy uncertainty could profit as markets reassess the data's nuances. For now, the playbook is clear: rotate toward equities that benefit from a gradual recovery and avoid bonds that are overvalued in a low-growth, moderately inflationary world.

The author holds no positions in the stocks mentioned. Past performance is not indicative of future results.