US Stock Market Holiday Outlook: Consumers in Focus Amid Market Volatility

Key Takeaways:

• Markets focused on consumer spending heading into holiday season.
• Market volatility increased ahead of key shopping period.
• Tariffs and inflation putting pressure on lower-income consumers.
• Divergent consumer spending expectations: cautious lower-income, partial spending from higher-income.
• Potential impact of 2026 tax cuts to boost spending.

As the US stock market enters a shortened trading week due to Thanksgiving, investors' attention turns to consumers. After a period of volatility, the market's direction remains uncertain.

Last week, the S&P 500 recorded a weekly decline, down 3.5% since November, and is on track to record its worst monthly performance since March. FactSet data shows that market volatility has increased significantly before the holiday season and annual shopping peak.

Liquidity Shortages Exacerbate Volatility

With some investors on vacation and market liquidity thinning, price volatility is likely to intensify this week. David Kelly, Chief Global Strategist at JP Morgan Asset Management, stated in a telephone interview that he expects this year's holiday season to be "relatively soft." Tariffs have driven up prices for a range of goods, including imported toys, which is "not good news" for many consumers.

Consumption is seen as an important engine for the US economy and corporate profits. Retailers are hoping that "Black Friday" discounts will attract large crowds of customers, but high tariffs and inflation are putting significant pressure on lower-income consumers' willingness to spend.

Kelly expects lower-income consumers to be "very cautious" during the holiday season, while higher-income consumers may "only spend a portion of their stock market gains." This divergence in consumption patterns is known as "K-shaped" - where higher-income earners become wealthier due to rising asset values and saving at high interest rates, while lower-income earners face greater pressure.

"Spending by the wealthy is not a big problem," Kelly said, "but spending performance by others is weak."

A US retail sales report, delayed due to a government shutdown, is expected to be released this week, but that report only covers September data, which Kelly described as "old news."

Tariff Pressures and Retail Profit Erosion

Jeffrey Sherman, Deputy Chief Investment Officer at DoubleLine, mentioned that the market is not paying enough attention to taxes imposed on the US border, and expects more "tariff pain" to spread through the supply chain. At this stage, there are still questions about how much tariff costs will be passed on to consumers by companies, and to what extent profit margins will be eroded.

The JP Morgan Asset Management 2026 outlook report mentioned that "US tariffs have grown significantly, bringing in more than $29 billion per month on average from June to October. To date, the majority of tariff costs have been absorbed by retailers."

Target's Chief Commercial Officer Rick Gomez said on an earnings call that "as we enter the holiday season, we recognize that consumers remain cautious," and pointed out that "employment, price affordability and tariffs" are key concerns.

The S&P 500 consumer discretionary sector has fallen more than 7% this month to date, the biggest drop since March, mainly due to sharp declines in technology giants Amazon and Tesla. The AI ​​fever has raised concerns about value bubbles, resulting in particularly volatile performance in technology stocks.

Kelly pointed out that "the entire market has priced in optimistic views about AI, will it be corrected? It's only a matter of time."

With increasing concerns about the AI ​​bubble, the sharp drop in technology stocks last week dragged down the entire S&P 500. At a time when investors traditionally expect a "Christmas rally," the index has had a poor start, losing 1.3% so far in the fourth quarter of this year. However, the S&P 500 is up 12.3% year-to-date, just 4.2% away from its closing high on October 28.

Consumer Sentiment Low but Potential for Rebound

"Public mood is generally not good," Kelly said, but low consumer confidence does not always lead to lower spending. The final reading of the University of Michigan Consumer Confidence Index showed a decline in November. Joanne Hsu, director of consumer surveys, commented, "Consumers are frustrated by persistent high prices and declining incomes."

But Kelly believes that the peak of tax cuts brought by the "big and beautiful law" in early 2026 may revive confidence, "providing an excellent opportunity for retailers to raise prices accordingly." This may offset recent stock market pressures and lead to a new round of "small spending sprees."

On Friday, US stocks rebounded at the close, but the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all recorded weekly declines. On Thursday of this week (November 27), the US stock market will be closed for the Thanksgiving holiday.