Goldman Sachs warns US consumers could have a challenging few months

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Goldman Sachs is sounding the alarm about the health of US consumers, who are bearing the brunt of inflation stemming from the conflict with Iran.

And the weakness could be pronounced, Goldman warned in a new note on Tuesday.

What Goldman warned about the consumer: Goldman strategist Ronnie Walker said, "What originally appeared to be a solid year for consumer spending has quickly become more challenging. ... We expect weak real consumption growth over the coming months."

Why now: It all boils down to the impact of far higher gas prices.

"Gasoline prices have increased by nearly 40% since the war began, representing a roughly $140 billion annualized headwind to household incomes at current levels," Walker wrote. "Under our commodity strategists’ baseline forecast where Brent [crude oil] returns to $80/bbl by year-end, we expect this headwind to shrink to $60 billion annualized by year-end but total $70 billion for 2026 as a whole. Higher gasoline prices disproportionately weigh on the spending of households in the lowest income quintile — who spend roughly four times as much on gasoline as a share of after-tax income compared with those in the top quintile — and spending on discretionary categories, such as restaurants."

What the consumer data says: The latest University of Michigan Consumer Sentiment Index showed that US consumer confidence this month has plummeted to a record low of 47.6.

This represents a staggering 11% plunge from March and is the lowest reading in the survey's 74-year history. It even fell below the levels seen during the 2008 financial crisis and the 1980s inflationary shock. The decline was broad-based across all age groups, income levels, and political parties.

Read more: What is consumer confidence, and why does it matter?

Dour consumer moods reflected the spike in gas prices related to the Iran war. Year-ahead inflation expectations increased to 4.8%, the largest one-month jump in a year.

Next, keep an eye on March retail sales data out Tuesday morning — it should give a good snapshot into how consumers responded last month to rising energy prices.

What consumer stocks say: Investors have begun to brace for softer earnings results from fast food players and dollar stores with outsized exposure to lower-income consumers. Shares of McDonald's (MCD), for example, haven't partaken in the broader market rally and are down 1% in the past month. Dollar General (DG) and Dollar Tree (DLTR) haven't done much either, up 1% each in the past month.

What Yahoo Finance is hearing about the consumer right now: Consumer company executives have painted a picture of a resilient consumer. Naturally, many CEOs of public consumer companies aren't going to say their customers are becoming more cautious. But the underlying numbers from many of the companies suggest the consumer is holding up, believe it or not.

PepsiCo (PEP) CEO Ramon Laguarta told Yahoo Finance that consumers are responding well to lower-priced Frito-Lay snacks, and the snacks business improved in terms of volume in the first quarter. Ulta Beauty (ULTA) CEO Kecia Steelman told Yahoo Finance that consumers aren't trading down to cheaper cosmetics or visiting less because of higher gas prices.

Steelman explained on Yahoo Finance's Opening Bid Unfiltered podcast, "95% of our sales are coming through our loyalty platform. When we survey them [consumers], what they tell us is that if they have a routine, they are really confident they're not going to compromise on that routine, which they view that as self-care for themselves. They view both beauty and wellness as self-care. So they are prioritizing that. Now, I'm not saying that could not change if gas prices are continuing to go up and if the consumer is getting squeezed. We haven't seen ... anything changing in our business [yet]. But, we have a full year ahead of us still."

Bottom line: It's reasonable to expect some softness in first quarter earnings numbers from more discretionary retailers like Macy's (M) when they report in May. Outlooks may be conservative as well.

Remember, just because the stock market is back to hitting record highs doesn't mean that translates into how much money the average US household has left at the end of each month after paying a lot more to fill up a car or truck to travel to work.

Brian Sozzi is Yahoo Finance's Executive Editor and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

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