When Everyone Is Freaking Out About Consumer Debt, Maybe The Real Trade Is In Who's Still Getting Paid

By Viktor Volkov | Against the Grain

Everyone seems convinced that the consumer is tapped out. The narrative is unified and terrifying: record delinquencies, flat retail sales, and a K-shaped economy where only the wealthy can afford a Chipotle burrito. The logical conclusion? Short anything discretionary, hide in cash, and prepare for the inevitable credit crisis that will "halt the growth." This fear is palpable, from the top comment on retail sales ("Everyone who isn't rich, is poor") to the WSB post on consumer delinquencies hitting a decade high. The crowd is positioning for a breakdown.

But what if the crowd is missing the forest for the trees? What if "consumer weakness" is the consensus trade that's now becoming dangerously crowded? The data suggests a more nuanced picture. Yes, delinquencies are rising—driven heavily by the resumption of student loan payments, a known, non-cyclical headwind. Yet, over 75% of S&P 500 companies are reporting year-over-year earnings growth, with that growth broadening beyond tech into industrials and healthcare. This isn't the profile of an imminent consumer collapse; it's the profile of a strained, but still spending, middle class that is prioritizing differently. The real signal isn't in the panic over debt, but in the quiet, consistent cash flows being generated by companies that provide non-discretionary essentials or mission-critical services. While Reddit fixates on the fear, the money is still moving—just not towards the same things.

This brings us to the most contrarian corner of the market right now: small-cap and mid-cap value. They are the forgotten children of this earnings broadening. The Goldman Sachs note cited in r/StockMarket explicitly highlights "larger near-term tailwinds for smaller and more cyclical stocks." Yet retail sentiment is nowhere near this trade. The discussion is dominated by MAG-7 angst, crypto cope, and fear. The iShares S&P Small-Cap 600 Value ETF (IJS) has been ignored while everyone debates software doom. This is where the disconnect lies: the macro fear (debt) is valid, but the micro reality (broad earnings, industrial strength) is being dismissed. When the narrative is this one-sided against a segment of the market that is fundamentally participating in the recovery, it’s time to look closer.

Engaging with the popular Reddit thesis on consumer debt is crucial. The bears are right that leverage is high and stress is building. But they are wrong in assuming it leads to an indiscriminate crash. Instead, it leads to a brutal rotation and a severe pricing of risk. Capital will flee speculative, unprofitable growth and rush towards companies with tangible cash flow and pricing power—the very companies often found in the small-cap value universe. The "flat" retail sales? They mask a shift from goods to services, from discretionary to essential. The real trade isn't betting against the American consumer; it's betting on the companies that get paid first, even when the consumer's wallet is stretched thin. The crowd is selling the small-cap baby with the bathwater.

What If I'm Wrong?

If the consumer truly breaks—not just strains, but snaps—and triggers a systemic credit event, then all correlations will go to 1, earnings will not matter, and the defensive rush will make the current panic look tame. In that scenario, the only haven is duration-matched Treasuries, not equities of any size.

Methodology Note: Analysis based on 43,701 tokens from Reddit's investing communities over the past 24 hours. The overwhelming pessimism created a clear consensus to fade, but the signal required digging past the doom-scrolling to find the structural earnings data. Confidence: 75%.