NoBull Economics Consumer Research @NBExRR

The economy is stable, but uneven, with a resilient labor market & steady growth offset by inflation & ongoing signs of lower-income consumer strain. Stable labor conditions show signs of cooling momentum and the Paychex Small Business Jobs Index fell -1.27% although hourly earnings rose +2.78%. Private payroll gains from ADP were revised down to 11k jobs in January though deposit data from BofA suggests payroll growth was modestly accelerating into February. The Fed’s latest Beige Book depicts a slow-growth environment (7 districts modest expansion & 5 with flat/declining activity) and manufacturing growth is supported by datacenter & energy infrastructure construction. Inflation pressures remain mixed but still above the Fed’s comfort zone. The PPI rose +0.5% in January, exceeding expectations, with service prices driving the increase as goods prices declined slightly. Interest-rate futures assign ~94% odds of no rate change at the next Fed meeting. Finally, lower-income households are purchasing smaller quantities and trading down to store brands according to Conagra Brands while higher-income households stockpile discounted goods. Higher gas prices (Iran tensions) are also weighing on consumers.

Risk-off trade was back in vogue at the end February, and for good reason, as Trump attacked another oil rich country over the weekend. In anticipation of this action, investors drove oil prices higher & safe haven (?) Treasury yields lower (under 4%). Surprisingly, gold & silver prices declined during the month even though these assets are typically correlated with risk-on trades. The stock indexes have not been performing well despite solid 4Q financial results which continue to be reported by U.S. companies. In any case, equity sector rotations consistent with risk-on trades includes a pivot from consumer discretionary (sit-down restaurants) to consumer staples (QSR?).

Consumer activity showed mixed but resilient signals to start 2026. BofA data indicated January card spending rose +2.6% y/y — the strongest pace since early 2024 — despite disruptive winter weather, suggesting underlying demand remains firm. However, broader macro data paint a softer picture: 4Q GDP growth slowed sharply to +1.4% following a government shutdown that shaved roughly -1% off growth, while exports & consumer spending moderated. Inflation pressures persist, with PCE near +3% and electricity prices rising well above headline inflation. Meanwhile, research from the NY Fed studies shows U.S. businesses & consumers absorbed nearly 90% of the 2025 tariff costs, suggesting a tariff lift could help economic growth. Household strain is evident and a rising share of lower- & middle-income renters now devote 50%+ of their income to rent & tax refund surveys suggest much of any windfall may go toward debt reduction rather than discretionary spending. Overall, the economy appears to be balancing resilient consumer momentum against slower growth, persistent inflation, and structural cost pressures, with policy shifts & tech disruption (AI-related labor risks) representing potential swing factors ahead.

Markets are navigating a “wall of worry” defined by geopolitical risk, AI disruption fears, tariff noise, & capex uncertainty—driving sharp but short-lived equity selloffs—while fixed income remains comparatively stable, with tight credit spreads and steady bond curves signaling limited systemic stress. Since the start of the year, geopolitical headlines, AI-related disruption concerns, and shifting capital-expenditure expectations have triggered repeated bouts of turbulence, particularly in tech, consumer discretionary, and financials. AI announcements have prompted “shoot first, ask questions later” reactions—pressuring insurers, asset managers, brokers, and enterprise software names amid fears that generative tools could erode competitive moats. The consumer staples/discretionary ratio remains elevated, suggesting a more defensive tilt, even as markets frequently rebound on expectations of rate cuts. Commodities & precious metals have experienced outsized swings, amplifying cross-asset volatility. In contrast, global fixed-income markets have shown greater poise. Most developed-market government bond curves (ex-Japan) have been broadly stable, corporate credit spreads remain near historic tights, and bond fund inflows have been solid. The environment reflects episodic equity stress without broad financial deterioration, revealing sentiment-driven volatility rather than fundamental breakdown and creating opportunities amid exaggerated reactions to AI & policy headlines.

The current chicken little market is marked by screams that the “sky is falling” when it is near impossible to find a legitimate reason why. Well, its valuations, duh! But the median LTM EV/EBITDA for the S&P 500 is 14.7x, right in-line with its 3-year average. Maybe punk financial performance for the S&P 500 companies? We checked that – analysts are looking for mid-to-high single-digit median growth for both revenues & EBITDA for the 1QE period. It’s AI you fool… It’s going to replace American workers, boosting the margins of all the companies in the S&P 500 – wait isn’t that good for stocks?? Not really, because American workers are all getting laid off and that is bad for consumer stocks. Well, the most recent 4.3% unemployment rate looks good even if no jobs seemed to be added during 2025 (back in the day). In any case, a spike in unemployment would spark a Fed rate cut – that would be bullish for stocks – right? Naw, probably not!

Consumer conditions are mixed: wage growth remains strongest for higher-income households while lower-income gains lag, and December retail sales disappointed, signaling a year-end spending pullback. Inflation data is moderating with nearly flat import prices (supported by Cleveland Fed nowcasting) although online prices spiked sharply. Consumer expectations improved modestly as job-loss fears eased, income expectations ticked up, and short-term inflation expectations declined, though access to credit is expected to tighten. Card data show solid 2.6% y/y January spending growth, but beneath the surface a widening income divergence is emerging, with middle-income spending softening, thus creating a more pronounced “K-shaped” dynamic. In conclusion, the consumer backdrop is stable but increasingly uneven - near-term spending is supported by a tax refund boost yet weakening lower-income momentum poses a downside risk once temporary tailwinds fade.

Here we are at the beginning of the 4Q25 earning season, and of those companies that have reported, 80% have beaten analyst estimates. Not bad! In any case, the market cannot decide whether it loves or hates the tech stocks that are so important to economic growth and the market. First, everyone thought the software stocks were finished (AI was going to replace software) and then JPMorgan comes out with a strong recommendation to snatch-up the beaten down software sector. In any case, the one thing that cannot be denied is that we live in a tech world. Macro economists are pointing to sub 2% real GDP growth for the foreseeable future at a time when median revenue growth for the S&P 500 companies is forecasted to be up 6% with earnings expected to increase by 9% (margin expansion) – and even faster for tech companies. Despite the increasingly obvious recognition that AI’s potential impact on society and the economy may be like the advent of electricity or the automobile, investors are fretting that Amazon is investing too much into its future, sending its shares reeling. Only Americans could get upset about a company investing in its future while the Japanese government just announced its going to inject 10 trillion yen ($65B) into its AI & semiconductor sectors 😂. Maybe the market is overvalued, but we should still give the U.S. a chance.

NEW UNIT INVESTMENT REPORT 2025 - 2026 EXECUTIVE SUMMARY Key Points: New Build Costs Moderate but Build vs. Buy Ratio Nears 12-Year High - The sales-to-investment ratio (excluding land) for the $1B+ chains was basically unchanged and the new build ROI declined slightly as a +2.9% increase in construction costs exceeded a +2.7% increase in new build AUVs. - The 2025 New Build Cost vs. Buy (existing store) Ratio increased +2.1% y/y to 1.9 which is just below the 12-year high (2.0 set in 2022), reflecting a +2.9% increase in new build costs and a -1.6% decline in M&A unit-level EBITDA multiples. - Building construction input cost inflation has moderated to +1.4% during 2025, down from +14% during 2022.

Mixed data reporting includes evidence of a cooling labor market (ADP reported just 22,000 private-sector jobs added in January, down from 186,000 last February) with this trend aggravated by Amazon’s 16,000 layoffs which were driven by AI-related efficiency gains rather than cyclical or performance-related factors. Conversely, BofA recently reported that its internal data points to a reaccelerating labor market and Paychex reported hourly wages were up +3%. Performance Food Group reported that restaurant traffic continues to struggle although local restaurants continue to outperform legacy chains. Chipotle reported volume struggles, reflecting a cautious consumer environment but Yum reported that QSR demand remains resilient for brands with strong value perception, cultural relevance and differentiated menus. Visa & AMEX reported resilient consumer & business spending and PMI data shows manufacturing activity has improved. Is the glass half full?

Not a great week for stocks through 2/3/26 & perhaps this is attributable to some high-profile tech misses (explaining the Nasdaq’s results). In general, it seems like the market has set a very high bar to justify current valuations with investors looking for reasons to sell. Notably, silver crashed on Friday Jan 30 as COMEX silver futures dropped -31% (for every 1 oz of real silver there are hundreds of paper contracts tied to it & many traders were long silver using borrowed money so when prices started falling those traders were forced to sell because exchanges demanded more margin). It looks like the market is showing signs of buyer’s fatigue given all the headlines about market tops, although an analysis of the individual companies in the S&P 500 shows that most are trading well below their 52-week highs so go figure. Maybe it has to do with the terrible weather on the East Coast which has made everyone irritable – nothing a trip to the Bahamas couldn’t fix…

It was a crazy end to the month of January. Silver crashed on Friday Jan 30 as COMEX silver futures dropped -31% (for every 1 oz of real silver there are hundreds of paper contracts tied to it and many traders were long silver using borrowed money so when prices started falling those traders were forced to sell because exchanges demanded more margin). In any case, the month was good to stock indexes, especially the emerging markets which benefit from a weaker US$. Interest rate sensitive indexes (Russell 2000 small caps & full-serve restaurants which target low-income consumers) were up because of a growing consensus that Trump’s new Fed chair will lower rates further this year. Nobody knows what is going on with Bitcoin…

The U.S. economy is expected to move towards a more balanced state, supported by solid productivity growth, AI-driven business investment and temporary fiscal stimulus early in the year, with real GDP growth above 2% before moderating. Sticky inflation should ease during 2H26 as tariff, rent & wage pressures cool (core inflation is expected to trend lower toward 2.5% by late 2026), allowing the Fed to resume rate cuts toward a 3% to 3.25% range. Growth remains bifurcated, with high-income consumers benefiting from asset price gains while housing & lower-income households face ongoing pressure. Labor market conditions are cooling but remain stable. The Federal Open Market Committee just reported that indicators suggest that “economic activity has been expanding at a solid pace” and that the unemployment rate “has shown some signs of stabilization”, explaining why it maintained rates for now.

X is filled with commentary about the ongoing US$ reset, specifically paralleling the 1985 Plaza Accord when U.S., Germany, France and the U.K. agreed to intentionally weaken the US$ to address America’s huge trade deficits with Japan & Germany. Resultantly, the Yen went from ¥240 per $1 in 1985 to ¥120 per $1 over the next 3-5 years, resetting global trade. Trump has repeatedly indicated that he wants a weaker US$ to help domestic manufacturing and we are currently witnessing Yen weakness which has implications for the very important Yen carry trade (hedge funds borrow Yen for next to nothing to invest in U.S. risk assets). Notably, a weaker US$ is likely to pump-up the dollar value of hard assets (silver, gold, crypto?? and perhaps U.S. stocks, especially the exporters. In the past, a strong US$ was good for foreign investors in Treasuries and U.S. stocks, however in the current trade war the U.S. can’t count on our frenemies to buy U.S. securities. Now is the time for Uncle Sam to convert a weakening US$ into ownership of countries like Greenland 😎. X is filled with commentary about the ongoing US$ reset, specifically paralleling the 1985 Plaza Accord when U.S., Germany, France and the U.K. agreed to intentionally weaken the US$ to address America’s huge trade deficits with Japan & Germany. Resultantly, the Yen went from ¥240 per $1 in 1985 to ¥120 per $1 over the next 3-5 years, resetting global trade. Trump has repeatedly indicated that he wants a weaker US$ to help domestic manufacturing and we are currently witnessing Yen weakness which has implications for the very important Yen carry trade (hedge funds borrow Yen for next to nothing to invest in U.S. risk assets). Notably, a weaker US$ is likely to pump-up the dollar value of hard assets (silver, gold, crypto?? and perhaps U.S. stocks, especially the exporters. In the past, a strong US$ was good for foreign investors in Treasuries and U.S. stocks, however in the current trade war the U.S. can’t count on our frenemies to buy U.S. securities. Now is the time for Uncle Sam to convert a weakening US$ into ownership of countries like Greenland 😎.

Two laws that would permanently fix the U.S. fiscal trajectory: 1️⃣ Federal spending must decline 1% every year — no emergencies, no carve-outs, no exceptions. 2️⃣ All income tax rates must fall 1% every year until we reach a simple, permanent 10% flat tax for individuals and corporations — no loopholes, no exemptions. Less complexity. Less distortion. More growth. More accountability. If Congress can’t live within shrinking budgets and simpler taxes, it’s not a revenue problem — it’s a discipline problem.

Everything was going along just fine until Trump decided to rename Greenland “Trumpland” by coercing the European nations with some friendly tariffs. It is hard to believe that investors are spooked by this predictable saber rattling given how many other Trumpian threats have harmlessly expired. It is almost like investors are looking for a reason to sell, and any provocation, no matter how unrealistic, serves as a catalyst. In any case, investors decided on 1/20 to move out of stocks & bonds to pile into silver & gold. The interesting thing is that the Russell 2000 small cap index withstood the most recent selloff, suggesting that investors continue to look for a rate cut which could benefit the smallest, most indebted companies. In any case, we continue to remain focused on the improving consumer economy which is being completely ignored by the market (especially judging by the consumer discretionary sector which declined -3.6% for the week).

The Great Valuation Reset 📉 Stocks trade on P/E multiples — and higher growth earns higher multiples. Simple. But here’s the catch 👇 A common way to gauge the S&P 500’s valuation is by looking at the earnings yield (1 ÷ P/E) vs the 10-year Treasury yield. That spread = the equity risk premium. Over the past couple of years, that premium has collapsed. 📌 Result? Even when companies deliver solid earnings, stocks often go nowhere — or fall. This isn’t an earnings problem. It’s a valuation reset problem. When risk-free yields rise, multiples compress. And prices adjust — even with good fundamentals. Macro > Micro.

🍕 Pizza pricing just broke lower. Little Caesars has launched a $4.99 large 1-topping pizza offer (2 required), igniting what looks like the most aggressive value move in years. At a time when peers are pushing $15–$20 price points, this is a direct challenge to industry pricing discipline — and could reset consumer expectations heading into 2026. This isn’t marketing. It’s strategy. #PizzaWars #PricingPower #ConsumerSpending 🍕📉

Arby’s core equities include its unique QSR NY deli positioning, the growth of protein as a diet staple, strong brand fundamentals, effective TV marketing, and a steady stream of value promotions. Given all this, we would expect industry leading comps. However, Arby’s recent sales pressure reflects that its core low-income customers are struggling in the current macro environment. Here in lies the brand’s primary challenge – while a more affluent consumer might recognize the relative price value of an Arby’s Reuben sandwich which stacks up nicely compared to what the rich pay multiples for in NYC, the rich do not frequent Arby’s. So, how does Arby’s reposition itself above its roots as a legacy roast beef chain? Perhaps this is a facility/store format question, and we would like to see Arby’s trial a Potbelly type prototype to see if the brand could leverage its sophisticated menu and marketing into an upscale pivot sufficient to address a more stable middle class demo.

First 5 Days Indicator – If the S&P 500 is up in the first 5 trading days of the year, the full year tends to be positive ~70% to 75% of the time. While we have not completed 5 full trading days (just 3 days through 1/6/26), things are looking up. First, we would point out that this is a key election year (midterms in November), and the current administration has significant incentive to pump the economy and the market as much as possible or risk losing control over the Congress. Trump’s stakes are high if he wants to avoid getting impeached… Polymarket currently shows a 47% chance of a Republican Senate & Democratic House. In any case, we are going to get a much more accommodating Fed chief this year to go with tax breaks to help the consumers who are looking better positioned as we go - boosted by lower oil prices & rents, easing inflation, a decent job market and higher stock prices which today’s consumers are more likely to benefit from.

While last year was great for the S&P 500 (+18% total return driven by AI/tech stocks) and silver (+146%), ongoing fast food and sit-down stock struggles reflects an investor pivot away from everything consumer.