Tariffs push consumer discretionary atop sector risk analysis in Q2 2025

Signs of rising credit risk and a dimming outlook for performance propelled the consumer discretionary sector to the top of S&P Global Market Intelligence's quarterly analysis of US public sector risk.

Risk factors into private equity investment decisions. High levels of risk in a sector can exert downward pressure on corporate valuations, potentially signaling a buying opportunity for fund managers. Rising risk can also delay exits from existing investments in affected sectors.

In the second quarter, consumer discretionary led all other sectors on the number of rating downgrades issued for companies over the three-month period. Consumer discretionary also ranked near the top on several other measures of risk, including the number of non-investment-grade companies, median probability of default for businesses in the sector and instances of lowered corporate guidance issued in recent months.

Tariff policy was a top risk factor for the US consumer discretionary sector in the first half, threatening supply chains and sales forecasts.

However, challenges in the sector date back further than the start of 2025 as private equity portfolio company bankruptcies shot to a record high in 2024, with the consumer discretionary sector leading the way. Consumer discretionary recorded a total of 29 bankruptcy filings, which was more than any other sector in the US.

Credit rating downgrades

There were more long-term credit rating downgrades for the consumer discretionary sector than any other sector over the last six months, with 30 downgrades since the start of the first quarter, according to data from S&P Global Ratings and Market Intelligence. The downgrades correspond to rising uncertainty in the companies' ability to repay debt.

The total includes 23 downgrades just in the second quarter, also more than any other sector in the US.

The financial sector ranked second on the number of credit rating downgrades since the start of the year, followed by communications services.

In another gauge of creditworthiness, 291 US consumer discretionary companies were classed as non-investment grade by Ratings as of June 25. This was the second-highest count of non-investment-grade companies in any US sector after industrials, where 330 companies were considered issuers of non-investment-grade securities as of June 25.

Corporate guidance

Listed companies in the US consumer discretionary sector issued lower corporate guidance 12 times in the second quarter through June 25, up from seven times in the first quarter, according to Market Intelligence data.

Automaker General Motors Co. cited a potential tariff impact of $4 billion to $5 billion on earnings before interest and tax when it cut its 2025 guidance during an earnings call in May. US new-vehicle retail sales slowed in June after experiencing a pre-tariff jump in March and April.

The impact from tariffs includes "about $2 billion coming from vehicles we import from [South] Korea as well as tariffs on vehicle imports from Mexico and Canada in addition to indirect material imports," CFO Paul Jacobson said during the call.

Consumer electronics retailer Best Buy Co. Inc. cited tariff costs and the impact of higher prices on consumer sentiment when it cut its financial guidance for fiscal 2026 in May.

"The consumer is remaining resilient, but we've been very clear to say they are making trade-offs in their spend and their budget decisions based on higher prices across many areas of their lives," CEO Corie Sue Barry said in an earnings call held May 29.

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Probability of default

Consumer discretionary ranked third in terms of median probability of default in the second quarter as of June 20, according to Market Intelligence data. The median probability of default for listed companies in the sector was 2.95%, down slightly from 3.07% in the first quarter.

Healthcare led all other sectors on the median probability of default with a score of 6.17%. Although still higher than in any quarter in 2024, the second-quarter score represented a decline from the 6.79% median probability of default in the first quarter.

Listed companies in the communication services sector had a median probability of default of 4.82% in the second quarter, up from 4.70% in the previous quarter.