Stocks May Turn Lower If Consumers Turn Gloomy as Tariff Inflation Surfaces

Will stock markets sour on economic growth trends if US consumer confidence gives way?

• US retail sales data topped forecasts, but the second-quarter trend looks dour.
• Financial markets tellingly added to 2026 Fed interest rate cut expectations.
• Consumer confidence data is now in focus for a view into growth dynamics.

Wall Street cheered after US retail sales data showed receipts rose more than economists expected. The US Census Bureau (USCB) reported that sales posted a monthly rise of 0.6% in June, topping median forecasts calling for a meager increase of just 0.1%. Year-on-year growth sped up to 3.9%, posting the first increase in three months.

Rebounding motor vehicle sales drove the rosy outcome, rising 1.21% from the previous month. However, this follows steep declines in April and May, which recorded losses of 0.72% and 3.81%, respectively. Vehicles make an outsized contribution to overall retail sales, accounting for about 20%-22% of the total.

US retail sales report: less than meets the eye

This looks less encouraging than the headline numbers would suggest. While June’s recovery flatters monthly results, sharp losses in the previous two months leave vehicle sales net down close to 3.3% over the period. Put simply, last month’s rise moderates the degree to which sales retrenched in the quarter, but it does not alter the dour trend.

That seems ominous. Consumption is by far the biggest driver of US economic growth, accounting for close to 68% of overall gross domestic product (GDP). Tariff-induced anomalies in imports and inventories aside, first-quarter data saw the weakest contribution since the second quarter of 2020. The second quarter now looks likely to be soggy, too.

That may explain what happened with Federal Reserve monetary policy expectations following the retail sales report. Fed Funds futures show scope for rate cuts this year was modestly hemmed in, with traders discounting just 38 basis points (bps). The view for 2026 turned more dovish however, calling for 73bps in easing.

Taken together, this amounts to 110bps in stimulus between now and the end of next year, against the US central bank’s latest forecast – issued in June – pointing to just 75bps. The disparity is most acute in 2026, where the Fed sees just one standard-sized 25bps reduction, while the markets have all but fully priced in three of them.

US consumer confidence data: will it spook the markets?

The spotlight now turns to a closely watched survey of US consumer confidence from the University of Michigan (UofM). It is expected to show that sentiment improved a bit this month after a potent jump in June against the backdrop of easing inflation expectations. Respondents’ one-year outlook moderated to 5% from 6.6% in the May edition.

US inflation data published earlier this week showed consumers began to see price growth linked to tariff increases rolled out by the Trump administration. A separate report showed wholesalers at the front end of the supply chain continue to absorb higher input costs into margins, suggesting that underlying price pressures may be mounting.

If this translates into a move upward on inflation expectations in July’s UofM report, the headline sentiment reading may disappoint. That would amount to a gloomy start for where consumption trends are heading in the second half of the year, amplifying concern about growth already on display in first-half price action.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit #tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.