There is a very interesting situation happening in the discretionary consumer market right now. The industry giants just wrapped up a earnings season that left no one very satisfied — the worst performance in nearly six years, to be exact.

Tesla, Ford, Starbucks, and others released numbers that fell short of expectations. But here’s the detail that catches attention: only 56% of S&P 500 discretionary consumer companies managed to beat profit forecasts in the fourth quarter. That’s well below the 73% of the broader index — the worst result since early 2020.

What’s going on? According to Steven Shemesh from RBC Capital Markets, consumers have become much more selective. Inflation hasn’t gone away, tariffs are likely to squeeze margins even more in the second half of the year, and many companies have already exhausted obvious cost-cutting measures. When you’ve already cut staff and reduced logistics expenses, it’s hard to improve margins without raising prices.

And that leads to a dilemma: after years of seeing costs rise, consumers may be reaching their limit. Some retailers are starting to lower prices to stimulate sales — which obviously doesn’t help margins much. For example, Chipotle chose not to raise menu prices as inflation advanced, and the CFO already warns that margins are expected to remain under pressure in 2026.

The high-end product market is particularly affected. Vehicles and home renovations are suffering because high interest rates have made financing more expensive. Consumers are afraid to take on new debt, and default rates have risen, especially among younger and lower-income groups. O'Reilly Automotive’s CEO has already seen a drop in DIY tool sales, while Lowe’s and Home Depot report persistent caution in the real estate market — expensive mortgages, fewer home sales, and job uncertainty.

But what’s really weighing on the market is the employment situation. The US added only 181,000 jobs last year — the lowest number outside of a recession since 2003. Wage growth has slowed, and fears of job losses due to AI are growing. According to ZipRecruiter, more people are accepting lateral moves or even salary cuts. Yung-Yu Ma, chief strategist at PNC Financial Services, commented that hiring trends look recession-like, even if the economy isn’t technically in a recession.

Lower-income families feel the impact much more acutely. The Economic Policy Institute found that real wages for lower-income workers fell in 2025 after years of growth — a trend that could have broader economic consequences. McDonald’s CEO even admitted that they continue to attract higher-income customers, but visits from lower-income consumers have decreased and are expected to remain under pressure.

For 2026, analysts are much more cautious. On February 20, the discretionary sector showed a net downward revision of -0.29 in earnings per share over 12 months, compared to 0.02 for the S&P 500 — more negative revisions than positive. Shemesh believes expectations for the quarter may have been overly optimistic.

There is some hope: tax refunds in the coming months could boost spending, and lower interest rates would also help. Auto parts retailers might perform better since their products are often necessities. Some furniture segments could also benefit as consumers replace pandemic-era items.

But overall, the labor market is the driving force here. If hiring slows further or layoffs increase, both consumer spending and corporate profits could face new challenges — and discretionary spending will be among the first to suffer.