Though the stock market has soared to record highs this year, 2025 hasn't been a walk in the park for the average American consumer. In fact, the signs that the consumer is struggling seem to be increasing. According to the University of Michigan, consumer sentiment just plunged to a three-year low, dating back to the depths of the 2022 bear market.
The labor market appears to have weakened substantially, as well. Although there hasn't been an official employment report from the government in two months, one report showed layoffs soaring in October, and job growth has been flat in recent months.
Consumer discretionary companies, including fast-casual chains like Chipotle and high-end footwear and apparel chains like Lululemon and Deckers (the makers of Hoka and Ugg), have all seen U.S. sales growth slow significantly this year. Chipotle CEO Scott Boatwright seemed to pinpoint the problem, noting that low-to-middle-income customers continued to reduce the frequency of their visits, and the 25-year-old to 35-year-old age group has been "particularly challenged."
Even smokers are trading down to cheaper cigarettes, as Altria said that the discount segment in the industry has expanded its share by 2.4 percentage points. CFO Salvatore Mancuso said, "Many adult smokers continue to face discretionary spending pressures resulting from a variety of macroeconomic headwinds, including the compounding effects of inflation."
Image source: Getty Images.
What it means for investors
Consumer spending is the biggest driver of the American economy. It represents roughly 70% of U.S. gross domestic product (GDP).
However, not every corner of the consumer economy is struggling. The travel sector remains strong, as recent earnings reports confirmed. Expedia, which makes most of its revenue from the U.S., reported blowout third-quarter results and raised its full-year guidance. Cruise lines, like Carnival, and airlines also continue to report record demand and revenue.
Compared to restaurants or apparel, the travel industry tends to skew toward higher-end consumers and business travelers, so it's more resilient to pain at the lower end of the income spectrum. However, the pressure on lower-income consumers and weakness in the labor market could get worse and possibly lead to a broad pullback in the market, especially with the S&P 500 hovering at an all-time high.
Dollar General could benefit
With consumer spending weak and other economic data pointing to a slowing economy, stocks that benefit from consumers trading down could be well-positioned. One of those is Dollar General (DG +0.09%), the discount chain that has more locations than any other retail banner, with more than 20,000 stores across the U.S.
Dollar General is a countercyclical business. It tends to do better when the economy is doing badly and sees revenue growth accelerate when consumers are struggling.
For example, during the height of the Great Recession, same-store sales jumped 9.5% in fiscal 2010 and 9% in fiscal 2009. By comparison, in fiscal 2008, which took place mostly in 2007 before the economic woes started to hit, same-store sales were up just 1.9%.
NYSE: DG
Key Data Points
Dollar General won't report third-quarter earnings until December. It's in the middle of its own turnaround as it has streamlined its supply chain and invested in better service and store improvements to try to claw back market share from Walmart and others.
In the company's second-quarter results, same-store sales rose 2.8%, driving revenue up 5.1% and earnings per share (EPS) up 9.4%. The retailer also raised its guidance for the year, a sign that the turnaround efforts are paying off faster than expected. In addition to the potential tailwinds from a weakening consumer, the stock also looks well-priced at a price-to-earnings ratio (P/E) of just 16.5, based on its EPS forecast of $5.80-$6.30.
Investors will learn more when Dollar General's third-quarter earnings report comes out on Dec. 4. However, if the consumer headwinds are sustained and the company can top its EPS forecast, the stock looks like a reliable winner during an uncertain time for investors.
