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The Consumer Is Splitting In Two, And Your Portfolio Should Reflect It

Under the AI melt-up, half the country is out of cash. Here's the split trade.

August 28, 2026

Everyone's glued to Warsh at Jackson Hole today. Fine. But the real story isn't happening at a conference podium. It's happening at kitchen tables.

The top decile of US households now drives close to half of all consumer spending, while the bottom half is missing card payments at levels we haven't seen since 2011. If you're positioned for one economy when there are really two, you've got a problem.

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The K Isn't A Metaphor Anymore

Consumer spending stalled in the latest personal income print. Headline PCE still ticked up to 3.7%. Pull it apart and the split shows up everywhere. Households above $250K kept spending on travel, luxury, services.

Everyone else pulled back on discretionary. Card delinquencies are marching toward 2011 levels, and CNBC just clocked 41% of cardholders making late or minimum-only payments.

That's not noise. That's structural weakness, papered over by AI capex and equity gains at the top. Own a broad consumer discretionary basket right now and you're long two very different economies at the same time.

How We Got Here

This didn't happen in a quarter. Real wages for the bottom two quintiles have barely moved since 2022 while asset prices surged. The Nasdaq and the S&P have both ground higher all year.

Sticky services inflation (Kansas City Fed's Schmid just called it "stubborn") hits renters and low-income households first. Gasoline is back above $4 a gallon nationally, with crude still elevated since the Iran escalation.

That's a regressive tax you barely feel if your book's up 20% this year. Make $45,000? Same pump price rewrites your monthly budget.

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Why It Persists

Wage growth has rolled over. Average hourly earnings gains are running below sticky services inflation. Real income is grinding lower for hourly workers.

Credit is tightening. Bank surveys keep flagging firmer standards on cards and autos. That was the release valve that carried consumers through 2023 and 2024. It's closing.

Fed policy is stuck. Core PCE at 3.3%, Kansas City calling policy "not restrictive." The September cut you were counting on isn't on the board at all — futures markets are split between a hold and another hike.

Housing is frozen. The 10-year where it sits pins mortgage rates near 7%. Low earners locked out. Existing owners locked in.

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What Comes Next

The top keeps winning. The middle keeps hollowing out. Expect stronger holiday numbers at Costco and TJX than at Target or Kohl's. Expect auto loan losses to bleed into card results through Q4.

And expect Warsh, whatever he says today, to spend the fall explaining why he can't ease into 3.7% inflation. Political pressure builds fast from here.

A midterm year with gas above $4 and delinquencies climbing is not a stable setup. Be selective on the consumer. Don't buy the sector.

How To Position

Own the trade-down. Off-price retail, warehouse clubs, aftermarket auto parts. These win when middle-income households defer new purchases and stretch what they've got.

Trim broad discretionary. If you own XLY, remember roughly a third of it sits in two names. The rest of that basket is more exposed than the ticker looks.

Watch card issuer credit costs. Subprime-heavy books show cracks first. Prime-heavy books hold longer, and reserve releases come later.

Add duration selectively. Unemployment drifts past 4.3% and the belly rallies fast, whatever Warsh says today.

Top Picks

TJX Companies (NYSE: TJX)

Cleanest way to play the split. The T.J. Maxx and Marshalls parent wins because middle-income households don't stop shopping when they pull back. They trade down.

TJX has strung together positive comps for a long run of quarters, and the opportunistic buying model actually gets better when other retailers over-order and end up stuck with inventory. Q3 lands in November. Card data already shows traffic strength.

What you want to watch: A real recession drags off-price down with everything else, and any margin slippage from wage costs hits the multiple.

Costco (NASDAQ: COST)

The membership model is the moat. Renewals above 90%. The recent fee hike is still flowing through the P&L. Higher-income households, the cohort still spending, are Costco's core demographic, so traffic stays sticky in a soft-consumer tape.

Comps have run mid-single digits. The gas business is actually a tailwind because Costco undercuts the corner station. It trades rich. Fine. You own this one through a bifurcation. You don't trade around it.

What to watch: The multiple leaves zero room for a comp miss, and any surprise in the exec transition rattles the stock.

Capital One (NYSE: COF)

The contrarian pick, and the one that maps directly to the split. Post-Discover, COF now runs one of the biggest US card platforms outside JPMorgan, and management has been loud about tightening on the subprime end.

Reserve build over the past two quarters was aggressive. That means when credit costs peak, earnings power gets released fast.

Trailing P/E looks elevated given current reserve and credit cycle dynamics, but the forward multiple is around 9x. Translation: the market is pricing in a real earnings recovery if charge-offs stabilize.

What to watch: If delinquencies keep accelerating into Q4, the market punishes first and asks questions later. Size your position accordingly. Give it room.

O'Reilly Automotive (NASDAQ: ORLY)

The average car on the US road is over 12 years old and getting older. Can't afford a new one? You fix the old one. O'Reilly's mix of DIY plus professional installer captures both sides of that trade.

Comps steady in the mid-single digits. The buyback machine keeps eating through the float. The recent split brought retail participation back without changing anything about fundamentals.

What to watch: If used car prices roll over hard, deferred replacement demand comes back, and the keep-the-old-car-running trade softens at the margin.

Setup Scorecard

Entry Zone: TJX under $135, COST on any pullback toward $900, COF between $215 and $225, ORLY under $90 post-split.

Target: 15-20% total return over the next 12 months across the basket. COF is the highest-beta contributor if credit costs peak by mid-2027.

Stop Loss: Trim TJX and ORLY on a break of the 200-day. Cut COF if net charge-offs climb more than 60bps above management's guided range in any single quarter.

Catalyst Timeline: Warsh's Jackson Hole keynote today. September FOMC. TJX and COST fiscal Q3 prints in November. COF Q3 late October with credit color.

Confidence Level: High on the trade-down thesis (TJX, COST, ORLY). Medium on COF, sized smaller until delinquency trends stabilize.

Where This Leaves You

The big picture: America is running two consumer economies right now. Own an index-weight discretionary basket and you're long the wrong side of the split for the next 12 months.

What it means: The top keeps spending. The middle is trading down. The bottom is cracking. Your book should reflect that, not the "consumer is strong" narrative you keep hearing on TV.

How to play it: Own the trade-down (TJX). The high-end resilience (COST). The deferred-purchase trade (ORLY). Want higher beta with a credit-cycle turn baked in? COF. Skip the broad discretionary ETFs. Be picky with card lenders leaning subprime.

That’s it for today’s edition—thanks for reading! Reply to this email with any feedback or let me know which macro trends or markets you’d like me to cover next.

Best Regards,
—Noah Zelvis
Macro Notes