How’s the consumer doing? Capital One will soon give the Street a fresh look
Club holding Capital One will unveil its second-quarter earnings report after the bell Tuesday, offering Wall Street a crucial look into the financial pulse of the U.S. consumer. Capital One’s financials don’t just give investors an understanding of the company’s performance. As one of America’s largest credit card issuers — with a more diverse client base than affluent-focused American Express — Capital One’s release is also a barometer for assessing the impact of ongoing economic uncertainty on its customers’ spending habits. Insights like these are especially important as the market continues to speculate over President Donald Trump’s tariffs, the Federal Reserve’s next monetary policy decision, persistent conflict overseas and the start of another quarterly earnings season. But a mixed bag of recent economic data has only complicated things further. On one hand, inflation picked up in June as tariffs begin to slowly work their way through the economy. Despite the Fed’s best efforts, the rise in both headline and core CPI showed investors last week that inflation still isn’t fully under control. Meanwhile, the labor market has proved to be more resilient as U.S. payrolls increased more than expected last month. There’s also been a five-week decline in initial jobless claims, suggesting that layoffs aren’t happening at a concerning pace. At the same time, continuing claims do remain elevated. That could indicate those who do lose their jobs are having difficulties landing new roles. The stock market has taken the murky backdrop in stride, though. The S & P 500 and tech-heavy Nasdaq Composite both registered record closes Monday. The S & P 500 was basically flat Tuesday, while the Nasdaq was slightly lower. Capital One’s upcoming release, however, should give investors a chance to cut through all the noise. Here are four ways the second-quarter results can provide a snapshot of U.S. consumer health. COF YTD mountain Capital One (COF) year-to-date performance Late payments Each quarter, management shares delinquency rates for its credit card and consumer banking businesses. Capital One reports its 30-day delinquency rates – known as the percentage of total outstanding credit card balances that are at least 30 days past due. If this rate rises, it can be a sign of financial stress for the U.S. consumer. CEO Richard Fairbank said so himself during an April conference call. He described delinquencies as “the best leading indicator” for a customers’ financial health. “Our delinquencies were stable on a seasonally adjusted basis throughout most of 2024,” Fairbank said. “And … they improved relative to our seasonal expectation over the last six months.” In the first quarter of 2025, Capital One’s 30-day delinquency rate for its credit card division came in at 4.27%, down from 4.54% the quarter prior. Delinquency rates are important for Capital One shareholders like us, too. That’s because the credit card business is the company’s biggest money maker – making up roughly 70% of its overall revenues last quarter – from interest-based income and various fees on their offerings. Some on Wall Street seem optimistic about Capital One’s credit quality. Ahead of quarterly earnings, TD Cowen upgraded the financial stock to a buy rating from hold. “Delinquencies have continued to demonstrate stability, and card losses have been outperforming expectations,” the analysts wrote in a July 8 research note. TD Cowen also praised Capital One’s recently completed $35 billion acquisition of Discover — a key reason we first initiated a position in the stock. Potential losses Additionally, if Capital One is worried that more customers are going to struggle paying back their loans in the future, they will park more money away to cover those potential losses. The amount the company sets aside is called its credit loss provision, and they report the number reach quarter. If management raises these, it could serve as an early warning that consumers can’t pay back their debts. Provision for credit losses came in lower than analysts expected at $2.3 billion last quarter, down from roughly $2.7 billion in the quarter prior. Car market Third, there’s auto loan originations. If auto lending increases, it can suggest consumers feel confident enough in the economy to make larger purchases. This barometer for consumer health, however, has been complicated with tariffs. Some may have felt rushed to buy vehicles as the deadline for larger levies on top U.S. trading partners have loomed. In the case of Capital One, the company reported a 22% year over-year-increase in auto loan originations last quarter. Auto lending is a relatively small business for Capital One, though. It’s one of several reported within Capital One’s consumer banking division, which makes up roughly 20% of the company’s overall revenues. Executive color Finally, it’s more than just the raw numbers on press releases and financial supplements. Management’s commentary during the conference call can also provide more insight into consumer behavior. CEO Fairbank, for example, talked about Capital One’s revolve rates last quarter. That’s the percentage of a customer’s credit balance not paid off in full each month. The executive reassured investors when he said this rate has “stabilized over the past year” and remains “below pre-pandemic levels for our major products and segments.” While higher revolve rates can benefit Capital One because it means more interest-based revenues, it can also mean customers are relying more on credit due to economic pressures like stagnant wages or inflation. Fairbank, a widely respect financial industry veteran, may also just share his thoughts on consumer health outright. He said the U.S. consumer “remains a source of strength in the economy” during the company’s last earnings call. Although he acknowledges that “some pockets [of them] are feeling the pressure,” on the whole he described U.S. customers as being in “good shape.” In June, the executive struck a positive tone again. “Despite all the noise out there and the tariff news and everything, even when we look at the very latest daily data on things like spending data or anything related to consumer behavior, we just don’t see an effect,” Fairbank said during Morgan Stanley’s U.S. financials conference on June 10. He added, “It’s as if our consumers aren’t really reading the same newspaper that we are. So, I’m cautiously optimistic about what I see.” Let’s just hope this trend continues into the rest of 2025. (Jim Cramer’s Charitable Trust is long COF. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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