DAILY STRATEGY: Main Point – We remain long Retail stocks. Retail stocks remain cheap on a relative basis (NTM PE spread at the 25th%tile relative to the S&P 1500) and have increasing EPS growth expectations relative to the S&P 1500. Since late May, we have had high conviction in long retail, and other Non AI related Cyclicals (HERE). We first introduced the asymmetry in the non-AI related Cyclicals in early May. Lower oil and 10yr yields being the positive catalyst. Today we mark to market the consumer data and trends following Personal Consumption Expenditures and Income data. The high frequency indicators of consumer spending are updated as well. We also take a victory lap on how expected AI related productivity growth is encouraging spending now! It’s not leading to weak spending based on fears over a job apocalypse.
First the Facts – The Consumption data yesterday showed REAL personal spending growth around 2%. Nominal spending growth is close to 5% though and the Income data suggests Nominal Income growth is running in the 4-4.5% range. Recent reports from PNC and BAC in both point to lower-income consumers starting to spend more again.
Two Things to Consider – 1) as the energy shock fades there is upside risk to REAL spending and Income growth, and 2) it should be appreciated how quickly households increased spending despite tariffs and higher gas prices. This suggests households feel financially secure and expect income to increase over time. Although there is some downside risk to consumer spending in the back half of 2026 as the tax refund impact fades, the consumer backdrop remains healthy.
How Expected Faster Productivity Growth Supports Consumption – We noted back in early February that the concerns around AI eliminating jobs and causing a confidence shock or recession through higher unemployment, over the next 1-3 years, was just wrong. Households feeling secure (see above) and increasing spending help reinforce WHY we thought investors were missing the positive economic demand story from AI that was RIGHT IN FRONT OF US. Investors seemed to be focused more on what COULD happen. Not what was happening.
To reinforce what typically happens (HERE) and what has played out. When productivity is expected to grow more quickly, it creates an expectation of faster future income growth. This encourages households to “draw some of that future income into current consumption,” which naturally lifts r ∗. FYI – the Fed has just made it clear that they think r* is higher. The Fed Funds rate is expected to remain above 3.,
Also, the massive capital spending boom required to implement AI-driven productivity gains significantly raises the overall demand for investment funds, further pushing up the equilibrium interest rate. Capex remains a support for economic growth and the income created from that capex will typically recycle through the economy.
Bottom line – The household and corporate sector response to an expected productivity boom is playing out. The basic “inside the box” macro thinking has served us well. The obvious risks to consumer spending are higher inflation leading to an aggressive fed hike cycle, or a significant disappointment in AI productivity. I.e. household and corporate spending slows (savings rates increase in the private sector) because it turns out AI tools are great to play with, but or not creating as much value as perceived.
Charts below…
The Retail names remain relatively cheap and have been increasing NTM EPS growth relative to the S&P 1500.
Nominal consumer spending is strong.
High Frequency Johnson Redbook Index Same Store Sales Weekly YoY increased to 10% from the previous week’s 9.4%. Johnson Redbook is a weekly, sales weighted measure of YoY same store sales growth at large U.S. general merchandise retailers (brick-and-mortar). It tracks sales at stores open at least a year, comparing the current week with the same week a year ago to strip out the effect of store openings and closures.
Dollar volume growth has improved and now sits at 7.16%. Fiserv’s Dollar Volume Growth tracks the YoY percentage change in same‑store sales dollar volume based on transactions processed through Fiserv’s merchant networks, providing a high‑frequency proxy for U.S. consumer card spending.
OpenTable dining & reservations have increased to its 99.7th%tile. The series measures the YoY change in seated diners from online reservations (for restaurants active on OpenTable), comparing the same day of the same week this year to last year. It is a noisy metric influenced by holiday timing, events, and weather (i.e, Father’s Day shifting dates).
Visa’s spending momentum index has been improving over the past few months on a headline level. The Index classifies individual Visa cards based on whether their spending is rising or falling YoY, then aggregates those scores into an index centered around 100. In practice, it measures the breadth of year‑over‑year spending acceleration across consumers (how many are speeding up vs. slowing down), not the dollar level of total sales.
