2025’s Economic Warning Signs Signal Uncertainty for 2026 Markets

The Bloomberg 500 Consumer Discretionary ex Amazon and Tesla Index closed 3.2% lower on December 15, 2025, marking its steepest one-day drop since August. The decline followed a series of soft retail sales reports and a rise in consumer sentiment indices to their lowest levels since 2022. With discretionary spending now contracting at a 1.8% annualized rate in the third quarter, market participants are reassessing growth forecasts for 2026. The broader equity market reacted with caution, as the S&P 500 futures fell 0.9% overnight, while the 10-year Treasury yield climbed to 4.87%, up 14 basis points in a single session. This shift signals a flight to safety amid expectations that the Federal Reserve may delay rate cuts until at least Q2 2026, even as inflation remains above target. The divergence between labor market resilience and weakening consumer demand is now a central concern for policymakers and investors alike. Key indicators suggest a potential pivot in consumer behavior: same-store sales at major retailers declined 2.4% year-over-year in November, while credit card spending growth slowed to 3.1%, its weakest pace since early 2023. These figures highlight a risk of a soft landing scenario, where inflation cools but economic growth stalls, increasing pressure on corporate margins in the consumer sector. Market participants are now closely monitoring December's employment report and the final reading of the Atlanta Fed’s GDPNow model, both expected in early January 2026. A failure to show sustained improvement in labor income and household balance sheets could trigger further downward revisions in equity valuations, particularly in high-multiple discretionary stocks.