"Most terrible in decades"! Goldman Sachs warns that American middle-class consumption is "losing momentum," and the 25-35 age group is "tightening their wallets."

Goldman Sachs issued a "red" warning regarding the health of American consumers, stating that weak consumption has spread from low-income groups to the middle class. Several corporate executives indicated that current consumer confidence has reached its "worst level in decades."

On November 1, Goldman Sachs consumer goods expert Scott Feiler wrote that the discussion around consumer health is shifting. Previously, companies attributed weak consumption to individual company factors or issues affecting low-income groups, but now more companies are reporting a slowdown in consumption, and the weakness has spread to middle-income groups, especially consumers aged 25-35. Over the past two weeks, consumer stocks have faced significant sell-offs, with the non-essential consumer goods sector underperforming the market by 500 basis points.

Kraft Heinz CEO Carlos Abrams-Rivera stated during the earnings call, "We are now facing one of the worst consumer confidence levels in decades." The company significantly lowered its full-year sales guidance, expecting a decline of 3% to 3.5%, a substantial deterioration from previous expectations. Management attributed the ongoing weakness to inflation-driven price increases and the pressure from cuts to food stamps.

Rich Privorotsky, head of Goldman Sachs' Delta One division, pointed out that this divergence was particularly evident in the latest earnings season: Apple's strong holiday outlook highlights the strength of high-end consumers, but the stock prices of dining and mid-tier non-essential consumer goods have plummeted, with the retail ETF XRT falling back to mid-October lows.

Corporate Earnings Reveal Intensifying Consumption Divergence

The latest earnings season shows that many companies targeting the middle class have suffered significant performance setbacks. Mexican burrito chain Chipotle's stock plummeted 17%, with the company stating, "The gap has widened, and middle- and low-income customers have reduced their consumption frequency, facing pressures from unemployment, student loan repayments, and slowing real wage growth." Mediterranean fast-casual chain CAVA fell 11%, home goods retailer SG dropped 9.6%, and SFM plummeted 26%.

Chipotle specifically noted that its core customer base, those earning less than $100,000 and aged 25-34, is cutting back on spending, shifting their consumption to supermarkets rather than competing restaurants. Chain restaurant Sprinkles Foods also reported third and fourth-quarter results far below expectations, emphasizing that weak consumption is impacting middle-income and younger consumer groups.

Even traditional defensive sectors have not been spared. Snack giant Mondelez International CEO Dirk Van De Put warned:

"A government shutdown will not help boost consumer confidence." Hershey's conducted discount promotions before Halloween because "American consumers are tightening their spending due to economic uncertainty and rising cocoa prices."

Weakness Spreading to Middle-Income Groups

Goldman Sachs consumer goods expert Scott Feiler noted in the report that there has been a substantial shift in market discussions. Previously, companies primarily explained weak consumption as specific company issues, weather impacts, or limited to low-income consumers, but now three major changes have raised alarms:

More companies report a slowdown in consumption, with businesses clearly indicating that weakness has spread to the middle-income group, particularly mentioning consumers aged 25-35, and stock prices have plummeted in the past two weeks.

Automotive parts retailer O'Reilly stated that it began to experience moderate pressure on DIY transaction volumes starting in the middle of the third quarter, reflecting a short-term reaction from DIY consumers to rising prices.

The weakness is mainly reflected in the delay of large purchases, while maintenance spending remains strong. Camping World noted that consumer resistance continues due to rising prices, uncertainty in the job market, and inflation, with recent sales of new RVs continuing to decline year-on-year.

Chain restaurant Cheesecake Factory pointed out:

"There was some volatility in September, but a bigger shift occurred in October. I looked back at old data from the last government shutdown in 2019, when the industry seemed to experience a decline of 1% to 2% per month."

Monroe also noticed recent weakness in consumer demand, with preliminary comparable sales in October down 2%, while the recently reported quarterly growth was 1.1%.

Consumer Stocks Face Significant Sell-off

Stock price performance confirms the deterioration of fundamentals.

The consumer discretionary sector underperformed the market by 400 basis points this week and by 500 basis points over the past two weeks. The consumer staples sector underperformed by 500 basis points this week and by 750 basis points over the past two weeks. The market harshly punishes companies that fail to meet expectations, and even those that exceed expectations do not receive a positive response.

Goldman Sachs analysis pointed out that although expectations for this earnings season were already low—necessities, hotels, Las Vegas, and dining sectors set a low bar—there were still some unexpected signals of a consumption slowdown. Comments from PayPal, O'Reilly, and Chipotle regarding consumers aged 25-35, as well as Royal Caribbean's net earnings falling short of expectations, all exceeded market expectations.

Booking Holdings, while its stock performance was decent, management noted a slight decline in average daily rates and a reduction in the number of nights stayed compared to last year, which may indicate that some American consumers continue to be cautious about non-essential spending. Mondelez International's CEO stated:

"Last quarter we saw category growth slow compared to the first half of the year, which is clearly not good news. This is driven by consumers' general concerns about the economy and frustration over rising prices."

High-End Consumption Remains Resilient

Despite pressure on the middle class, some companies targeting the high-end market or with scale advantages remain robust. Visa stated in its earnings report:

"When we look at the quarterly spending category data in the U.S., we see broad strong performance, including improvements in retail services and goods, travel, and fuel. Both non-essential and essential spending increased compared to the third quarter. The growth across spending categories remained relatively consistent with the third quarter, with the highest spending category continuing to grow the fastest."

Starbucks noted that transaction volume turned to positive growth in September, and university and campus business performed well this quarter. Management stated, "When we look at each age group, in the most recent quarter, we saw very good responses in both transaction volume and sales." Brinker International's Chili's brand performs strongly:

"Chili's continues to achieve sales growth among households at all income levels. While other companies in the dining industry are seeing low-income households cut back on spending, we are seeing just the opposite. Our customer base is very representative of American consumers across income levels, but the group we are growing the fastest among is actually households with an annual income of less than $60,000."