Key Takeaways:
The K-shaped economy is producing solid retail earnings and falling retail stock prices — a divergence that shows how deeply the AI trade has reshaped market priorities.
The S&P 500 has climbed double digits in percentage terms since January, yet the State Street SPDR S&P Retail exchange-traded fund and the Consumer Discretionary Select Sector SPDR ETF are both lower for the year. Walmart, Ulta Beauty, Dollar General and Ollie's Bargain Outlet Holdings each reported quarterly results that beat analyst expectations — and each saw its shares decline afterward, trading below pre-earnings levels.
"The low- and middle-income consumer remains the central pressure point," said Nik Modi, an analyst at RBC Capital Markets. "SNAP restrictions now active in 10 states, gas prices above $4 a gallon, and persistent food inflation are compressing discretionary budgets in ways that are showing up directly in our companies' volumes."
The divergence reflects a K-shaped recovery in which the wealthiest Americans keep spending while everyone else pulls back. The top 20% of earners account for roughly 60% of consumer spending, according to RBC Capital Markets analyst Steven Shemesh, which helps explain how retailers can beat earnings forecasts even as consumer sentiment remains depressed. Gas prices have risen more than 50% in the U.S., and the average number of gallons purchased at Walmart fuel stations fell below 10 for the first time since 2022, the company said on its most recent earnings call.
The Sentiment-Spending Gap
The disconnect between how consumers feel and how they spend is widening. Nearly half of 6,000 surveyed consumers — 46.1% — described themselves as "more cautious" with spending in the first quarter, according to data from Attain, a permissioned commerce data platform. Yet their actual transaction behavior showed a spend index of 98 and a discretionary spend index of 96, both only marginally below average. Consumers who said they were spending "much lower" actually grew their spending by 21.6% compared with the prior year.
"Sentiment alone can overstate the risk of spending pullback, while purchase behavior gives a much clearer picture of actual demand," said Ben Kartzman, president and chief operating officer at Attain.
Ulta Beauty reported first-quarter adjusted earnings of $7.74 a share, beating the $6.89 consensus, while revenue rose 11.1% to $3.16 billion. Same-store sales increased 5.3%, above the 4.7% estimate. The company raised the bottom of its full-year earnings forecast to a range of $28.36 to $28.80 a share, up from $28.05 to $28.55. Macy's posted net sales growth of 1.8% to $4.7 billion, its strongest quarter in four years, and raised its full-year outlook to $21.5 billion to $21.75 billion.
Despite those results, Ulta shares have declined 18.2% since the start of the year through Tuesday's close. The stock surged as much as 7.5% in after-hours trading after the earnings release before settling.
Why Markets Aren't Buying
The underperformance of retail stocks comes as investors rotate toward artificial intelligence and technology names, which have driven the bulk of the S&P 500's gains this year. In a market where the AI trade commands premium valuations, even retailers that beat estimates struggle to attract capital.
Yardeni Research contributing editor Jackie Doherty noted that Dollar General, Signet Jewelers and Ulta Beauty all raised per-share earnings estimates for the full year. "Employed and driving increasingly fuel-efficient cars, consumers didn't retrench much in the face of last quarter's inflation and high gas prices," she said.
Energy costs remain a relatively low 2.4% of consumers' expenditures, up from 2% at the start of the year. When energy last spiked in 2022, that figure climbed to 3.4% and "even then did not trigger a recession," Doherty said.
RBC's Shemesh said he expects overall retail sales to edge down on a quarter-over-quarter basis once tax refunds begin to run out and no longer provide a spending cushion. For now, the K-shaped economy means the consumer base is bifurcated — and the stock market is reflecting only the half that matters to AI-driven portfolios.
This article is for informational purposes only and does not constitute investment advice.
