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How to Invest as U.S. Consumer Businesses Struggle

Aug 6, 2025

Amid tariffs and tax reform, U.S. multinationals are set to thrive while domestic consumer companies fall behind. What could it mean for your investment portfolio?

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • Domestic consumer businesses face challenges from slowing consumption, rising inflation and increased credit stress.
  • U.S. multinationals, meanwhile, are poised to benefit from tax reforms and a weaker dollar enhancing their global competitiveness.
  • Investors should consider adding exposure to U.S.-based multinational exporters and capital-intensive firms, while diversifying portfolios with international equities and commodities.

Extraordinary fiscal and monetary policy support have turbo-charged the American economy relative to the rest of the world over the last 15 years, while also driving profound economic imbalances – between large and small companies, wealthy and median-income households, and older and younger demographics.

 

Now, with the implementation of global tariffs underway and the passage of the U.S. tax reform bill, Morgan Stanley’s Global Investment Committee senses that yet another series of “great divides” are opening – this time, between multinationals and domestic companies, as well as between consumer-facing companies and business-to-business enterprises. 

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Another Great Divide

As the impacts of higher tariffs and tax reform begin to roll through the economy, we see a growing divide among the haves and have-nots. This makes global stock selection more important now than ever.

U.S. Consumer Strain

First, consider signs of weakness on the consumer side of the U.S. economy and the implications for businesses that sell to consumers.

  • In the second quarter, inflation-adjusted, or “real,” final sales to private domestic purchasers – a measure of economic health that combines demand from businesses and consumers – rose only 1.2% year-over-year, its weakest reading since late 2022, down from 1.9% in the first quarter.
  • Meanwhile, inflation accelerated: The “core” Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, rose above forecasts, reaching 2.5% in the second quarter. A roughly 10% weakening of the U.S. dollar year-to-date adds to this challenge by reducing U.S. consumers’ purchasing power internationally and amplifying inflation.

 

Critically, these developments come at a time when labor markets are showing cracks and credit stress is emerging.

  • Quit rates and hiring rates are both down, wage growth continues to slow, and the additional compensation that people typically enjoy when switching jobs has declined meaningfully.
  • Even some upper-income Americans are showing signs of struggle: The share of consumers falling behind on credit cards and auto loans is growing fastest among people making more than $150,000 a year.

 

Finally, with imports at 12% of GDP, tariffs could function as a tax on U.S. consumers and importers of as much as $500 billion – more than offsetting any 2026 tax savings to these segments from the recently passed One Big Beautiful Bill Act.

 

U.S. consumer-facing businesses are already feeling the pinch. Among companies that have missed second-quarter earnings expectations, there is a concentration among automotive, airlines, shipping, hospitality, housing and health care.

Multinational Exporters Thrive

The weakening in the U.S. consumer market is exacerbated for companies that primarily serve that market and that are focused on imports. By contrast, U.S.-based multinational and export-oriented companies appear poised for growth. They face fewer external barriers to their exports, and the weaker U.S. dollar adds to their price competitiveness in global markets. Also, these capital- and R&D-intensive companies can invest with the certainty of improved tax treatment and promises of tax savings in 2026.

 

This tracks with a recent Macro Institute finding of a considerable performance gap between S&P 500 companies with high foreign sales and those with a domestic focus since April 9, the date the White House announced a 90-day pause on reciprocal tariffs.

Portfolio Implications

With all of this in mind, global stock selection will be more important than ever. Investors should consider adding exposure to U.S. multinationals, especially those that are large, non-consumer exporters and capital-intensive, as they are apt to enjoy continuing tailwinds.

 

Also look for stocks with potential for upside surprise in earnings and cash flow. They may be found in select tech stocks and other areas like financials, industrials, energy and parts of healthcare poised to benefit from policy shifts amid increased volatility, higher rates and a weaker U.S. dollar.

 

Consider adding diversifying positions in international equities, commodities and energy infrastructure.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from August 4, 2025, “Another Great Divide.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

 

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

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Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

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