Can US consumer confidence withstand Trump’s tariffs?

Upon his return to the White House, many people believed that Donald Trump would help ease inflation, re-energise American businesses and boost domestic growth. However, the president’s unpredictable nature, his favourite word ‘tariff’, and continuous headlines around DOGE job cuts have weighed on sentiment.

For now, little impact can be seen in the ‘hard’ labour data, with job growth and unemployment remaining steady. Yet headlines have been a key factor in weakening consumer confidence.

January retail sales declined 1.2%¹ and February saw a sharp fall in consumer sentiment².

February sales also looked soft, but the control print (excluding motor vehicles, gas, building materials and food services) brought a small breath of relief at +1%, compared with -0.9% in January³.

US exceptionalism

Given the uncertainty and low sentiment around US growth, we expect the consumer to be more cautious, which is likely to play through into softer sales. But it is worth remembering that the starting point was a period of ‘US exceptionalism’. So, while spending growth has fallen substantially from last year’s level of 3.2%, today’s figure of 1.9%⁴ still looks relatively healthy.

This backdrop leads us to focus more on individual companies’ strategies as a source of return, and less on general macro themes. As the consumer becomes more cautious, they become more selective over where they shop. They search for value and brands they feel connected to.

We also expect to see consumers returning to a more seasonal and action-led buying pattern in 2025 – needing a holiday or a specific brand event to drive them to purchase. Therefore, a key focus for companies this year needs to be how they engage with the consumer. Brands that get this right will outperform.

Attracting younger customers with brand ‘vibe’

In order to capture sales, especially from younger consumers, we have seen brands become more innovative and adventurous with their campaigns and social media presence. Many are choosing to focus less on specific products and more on the overall brand ‘vibe’. Sometimes, they have a bit of fun to push virality, such as with the recent death of the Duolingo owl.

We see this as a key opportunity for brands to differentiate themselves and create connections with their audience. Collaborations between brands have also proved to be an effective way to ‘generate heat’ and reach new customers: for example, Crocs, which partnered with the likes of Pringles, Haribo and Minecraft.

In 2025, we expect to see engagement evolve even further, with the increased use of marketing ‘activations’. These aim to generate awareness through events and interactions, which can be carried out on a large scale, aiming to ‘break the internet’, such as the retailer H&M’s takeover of New York’s Times Square with Charli XCX. Or, it can be smaller events, such as running clubs, to allow personal connections with the brand.

Retailers have already reacted to the moderating consumer, with promotional activity increasing in 2024. We expect this trend to continue. Discounts can be an effective tool to generate sales, but there’s a risk that overuse can hit margins and severely damage a brand’s image.

For example, the trainer brand Saucony struggled to sell its shoes at full price following a lengthy period of discounting⁵. Therefore, we look for retailers that take a disciplined approach. The real challenge now is for retailers to balance this alongside the additional cost from tariffs.

Strengthening US supply chains

An unintended benefit of the severe disruption to inventory in the aftermath of the Covid pandemic was that it highlighted how fragile and exposed to single points of failure many supply chains had become. In the years since then, we have seen retailers work to diversify their logistics, thus we expect them to adapt well to tariffs. Experience suggests that any impact will be shared between the consumer and company.

Retailers with the strongest margins will have more flexibility, with the capacity to absorb the impact. Conversely, operators with weaker brand value will have neither the capacity, nor the ability, to pass it on to consumers. Therefore, we expect to see an increased divergence between the strong and weak players in the market, which is where stock selection becomes important.

Advantages of active credit selection

So, we believe that the US consumer will remain resilient despite a softening in sales. However, this general assumption is only a small part of our approach. Tariffs will only highlight existing fundamentals, and as we move out of a ‘rising tide lifts all boats’ environment, we are confident that active credit selection will play a more important role in our portfolios.