The key to this earnings season rests in part on the consumer. Over the past two years, the U.S. economy has held up largely thanks to a strong consumer that has continued to spend even with the rise in inflation and interest rates — though, of course, the impact has hardly been equal. Pressures faced by lower-income consumers have been smoothed over by robust spending from the middle- and higher-income cohort. But recently, there have been signs of spreading weakness. With savings dwindling and the labor market softening, more companies are reporting changes in spending habits. Just this week, for example, PepsiCo topped expectations for its adjusted earnings per share in the second quarter, but narrowed its full-year revenue outlook because of falling U.S. demand. The beverage and snacks giant singled out a shift in shopper behavior across all income levels. For investors, that puts the consumer front and center this earnings season. Wall Street is trying to divine the future earnings growth potential of companies as traders navigate what many expect will be a choppy second half of 2024. “We need the consumer to continue to participate in aggregate,” Bill Merz, head of capital market research at U.S. Bank Asset Management Group, said recently, adding, “that picture needs to continue, needs to remain constructive, so that that 70% of GDP, which is consumer spending, continues to flow through and propel a stable economic environment.” ‘A shift in priorities’ Even with cracks emerging in the consumer, many investors anticipate a soft landing for the economy. But that doesn’t mean that all companies will fare the same, and investors anticipate that they will have to be more careful picking their bets in the second half of 2024. “What we’re seeing in terms of the consumer is really choosy behavior. The consumer is choosing what they’re going to spend on. They’re also choosing what they’re going to pay off,” Lindsay Rosner, managing director at Goldman Sachs Asset Management, said according to a transcript during a media roundtable this week. “They are spending, but they’re being more particular than they were before in terms of what they’re spending on,” she added. In fact, HSBC this week said there’s an opportunity for investors expecting a “K-shaped” recovery, or an uneven outcome for higher- and lower-income households. Companies that could benefit from higher-income consumers include travel companies such as cruise line operator Viking Holdings , as well as hotel chains Hilton Worldwide Holdings and Marriott International. Both are plays on “demand-resilient” luxury, HSBC said. Meanwhile, companies offering a value proposition to lower-income consumers trading down as they review their balance sheets are also winners of this theme. Big-box retailers Walmart and Target are buying opportunities, the firm said. Dave Sekera, chief U.S. market strategist for Morningstar, said food giant Kraft Heinz and cereal maker Kellanova are two buying opportunities that are undervalued and attractive. Kraft Heinz shares are down 13% this year, while Kellanova is up just 1%. “As more consumers shift their meal preferences to eating at home as opposed to eating out, that could provide a catalyst to lift these stocks valuations,” he wrote. Sekera also noted travel as one area where consumers are continuing to spend, even as they pull back on other purchases. “It is definitely a shift in priorities of how people are spending,” he said. ‘Thoughtful and specific’ To be sure, investors will continue to keep an eye out for signs of weakness such as further insight into the recent rise in delinquencies, whether in credit card payments or autos or mortgages. However, Goldman Sachs’ Rosner said the consumer has remained “smart,” even amid rising pressures. “While they may not have a perfect record [on payments] right now, they’re being very thoughtful and specific about what they’re doing,” said Rosner in a transcript. “And therefore, that’s why we’re not seeing very high delinquencies leading to impairment. So net-net this is a soft landing.”