I don’t know if it’s just coincidence or clever algorithms, but I have been getting a lot of music by The Who being piped through my Sirius XM channels lately. And, as I’m always in the mood for yet another challenging song to try to learn on my guitar (of course, while Pam has the ear plugs in), I have honed in on one of my favourites - “The Kids Are Alright” – a song that’s deceptively simple to strum and surprisingly hard to actually get right. It’s a song about being young, unsettled, and not quite sure what comes next. Pete Townshend wrote it in 1965, decades before anyone was talking about K-shaped economies or Gen Z spending power. But sixty years later, it struck me as a pretty fitting soundtrack for what’s actually happening in consumer spending right now — because if you look at the numbers, the kids really are alright. Better than alright, in some cases. While a lot of ink gets spilled on inflation-weary, debt-laden consumers, the fastest-growing pocket of discretionary spending in North America right now belongs to Gen Z and Millennials — and the reasons why say a lot about where this economy is headed.

Here's the piece that's been flying under the radar. Bank of America's internal card data shows that as of February 2026, spending growth among Gen Z and Millennial households has been outpacing Gen X and Boomers by a meaningful margin — and the "why" comes down to one line item: rent. For the first time since BofA started tracking this, rent payment growth for younger renters has fallen behind their after-tax wage growth. That's not a huge move on its own, but it represents a meaningful juncture in terms of consumer psychology and financial drivers. When the single biggest expense in a young household's budget stops eating an ever-larger share of the paycheque, the difference doesn't just disappear — it shows up somewhere else. In this case, it's showing up in electronics, apparel, and restaurants, the three categories where BofA is seeing the sharpest year-over-year gains among younger cohorts.

Numerator's consumer data backs this up from a different angle. Millennials and adult Gen Z now account for 32% of general merchandise and consumer packaged goods (CPG) spending in the U.S.  Think groceries, toiletries and cleaning supplies, as an example. This is an 8-point jump since 2020. Boomers, over the same period, have seen their share fall by nearly 10 points. That's not a subtle shift — that's a generational handoff happening in real time, and it's happening faster than most retailers' marketing budgets have caught up to.

There's a life-stage dimension here too that's worth sitting with. A study out of a Spanish business school (IESE), built on 500 million transactions, found that Baby Boomers and Gen X allocate 45-46% of their household budgets to essentials — housing, healthcare, the unavoidable stuff. Gen Zers still living at home, by contrast, spend just 17% of their budget on essentials and a striking 70% on discretionary categories. The researchers call it "prolonged financial adolescence" — income without the fixed obligations that come later. It's not necessarily a compliment, but from a spending-power standpoint, it's a pool of low-obligation dollars that didn't exist at this scale in previous generations, and it's arriving right as this cohort ages into peak earning years.

Morgan Stanley's consumer research team has been making a version of this argument for a while: Millennials are moving through their prime spending years, the oldest Gen Zers are just entering theirs, and Boomers — who have historically outspent the population average — are starting to pull back as they retire into rising healthcare costs. It's a genuine handoff, not a temporary blip, and the categories poised to benefit — online food delivery, footwear, activewear, autos, housing — read like a checklist of what a 28-year-old with a manageable rent increase actually spends money on. And where there might be gaps between the needs and means, as I wrote several weeks back, wealth transfer from Boomers to Gen Zers is happening before the will is read.

I'll flag one risk to this story before I move on, because it's a real one. BofA's data also shows that younger cohorts spend a disproportionately large share of their budget on gasoline relative to their discretionary spending. For many in this segment, 2026 has been a gamechanger as you can see in the above chart. That makes them the most exposed group to the oil price shock we've been living with since the Middle East conflict flared up — something I wrote about a few weeks back in "Bait of Hormuz." If gas prices keep climbing, the same households driving this discretionary growth are the ones most likely to pull back first. Worth watching.
 

The K-Shaped Consumer Isn't Going Away

Now, zoom out from demographics for a second, because there's a bigger structural story sitting underneath all of this, and it applies on both sides of the border: the K-shaped consumer. You've heard me use this term before, but it's worth re-grounding because the data is getting sharper, not fuzzier. In the U.S., the top 20% of earners account for more than 60% of total consumer spending, and a recent study by TD Bank (U.S. Consumer Spending: Still a K, but That’s OK**) found that after a brief pandemic-era reversal, the share of spending driven by higher-income households is returning to its pre-pandemic norm — meaning the concentration at the top is reasserting itself. Those households are spending confidently, and a good chunk of that confidence is coming from equity market gains and steady wage growth rather than just paycheque-to-paycheque cash flow.  Notably, U.S. consumer spending has actually been outpacing disposable income growth lately — households are dipping into savings and leaning on asset appreciation to keep the spending going.

Canada's version of this story is, frankly, sharper. A recent Boston Consulting Group analysis broke down household spending growth from 2021 to 2025 by income band.* The bottom 20% grew spending by 27%, the middle 60% by 19%, and the top 20% by 24%. On the surface, that almost looks egalitarian — everybody's spending more, roughly proportionally. But look at what's actually funding that spending. For the top 20%, income growth covered 106% of their new spending — meaning they didn't even need savings or credit to fund the increase; income alone did the job, with room to spare. For the middle 60% — the traditional backbone of consumer demand — income only covered 57 cents of every new dollar spent. The rest came from savings drawdown or borrowing. And for the bottom 20%, with income up just 3%, almost none of their spending increase was funded by income at all.

That's the real story behind "resilient" Canadian consumer spending headlines. Real spending is up about 2% in Q1 2026, in line with the ten-year average and roughly matching the U.S. — numbers that look healthy at a glance. But BCG's own framing is the right one: resilience is not the same thing as durability. Much of the growth isn't even going toward buying goods — it's going toward financial services tied to borrowing and asset-linked fees, while real spending on essentials sits flat and purchases of cars, furniture, and appliances are actually falling.

This is where the trade-down trend comes in, and it's visible in real time in Canadian retail. Dollarama has built its entire recent growth story on exactly this dynamic — inflation-driven consumers trading down to fixed-price merchandise, with same-store sales growth holding up even as the company nudges prices higher (that $1.25 item is $1.75 now, and shoppers are still buying it). Restaurant Brands is riding a similar wave, as diners shift toward value banners like Tim Hortons and Burger King rather than sit-down alternatives. Neither of these is a stock we hold in client portfolios today, but they're useful as a barometer — when your Boston Pizza night becomes a Tim Hortons run, that's the K-shaped consumer showing up in your own spending, not just in a chart.

Before I get to rates and markets, it's worth putting some numbers behind what "discretionary" actually competes against in a household budget, because the squeeze is real and it's measurable. Statistics Canada's most recent detailed household spending survey shows the average Canadian household spent $76,750 on goods and services in 2023, up 14.3% from 2021 — the largest two-year jump since the series began in 2010, and mostly a function of the 10.9% cumulative inflation over that stretch rather than households actually buying more stuff. Shelter alone eats up 32.1% of that spending, with transportation at 15.8% and food at 15.7%. Add those three together and you're at nearly two-thirds of the average household budget before a single discretionary dollar gets spent.

That's the backdrop against which every discretionary category has to fight for room. Clothing spending was up 18.9% from 2021 to $2,739 per household in 2023 — but even with that increase, it remained below 2019 levels once you account for inflation. Restaurants, recreation, and travel have fared better, rebounding past pre-pandemic levels as households prioritized experiences over goods coming out of the pandemic. And personal care spending jumped 30.1%, driven heavily by makeup, skincare, and grooming services — which, speaking as someone who's been sorting out his own skincare routine lately, tracks with what I'm seeing anecdotally as well. It's a small, almost amusing data point, but it fits the broader pattern: even in a squeezed budget, certain "treat" categories hold up because they deliver an outsized emotional return for a relatively small dollar outlay.

Spending Drivers

Three forces are doing most of the work behind everything above, and they're worth separating out. Inflation has come down a long way from the 2022 peaks but hasn't fully let go. U.S. PCE inflation sits around 2.8%, still above the Fed's target. Canadian CPI has been running 2.4-3.2% through 2026, and the elevated end of that range is almost entirely a gasoline story tied to the Middle East conflict — strip out gas and Canadian inflation is running closer to 2.2%, with core measures near target. The practical impact on discretionary spending is straightforward: goods categories like apparel, electronics, and home goods are the most price-elastic, and that's precisely where the trade-down behaviour is concentrated.

Interest rates tell an interesting divergence story right now. The Bank of Canada has held its policy rate at 2.25% for six straight decisions, down substantially from the 5.0% peak in June 2024 — a large amount of easing has already worked its way through the system. The Fed, by contrast, has held at 3.50-3.75% for five straight meetings, including the July 29 decision, which passed on a 9-3 vote with three regional presidents dissenting in favour of a hike. That's a real and growing gap in monetary conditions between the two countries, and it matters more than people appreciate for consumer spending specifically. Canadian mortgages have become increasingly weighted toward variable and short-term fixed structures, which means BoC rate cuts move through household cash flow faster than a Fed cut would in the more fixed-rate-dominated U.S. mortgage market. Even if the BoC sustains its pause alongside the Fed, I would expect that gap in consumer breathing room to widen further.

The equity market wealth effect stands above inflation and interest rates. The studies I referenced above by the Canadian financial institution and Boston Consulting Group point to rising asset values as a real funding source for high-income discretionary spending in both countries right now — not a marginal factor, a load bearing one. That means discretionary spending currently has genuine sensitivity to market direction on both sides of the border. A meaningful equity drawdown wouldn't just hurt portfolios; it would likely show up in discretionary spending data within a couple of quarters, hitting exactly the retailers, restaurants, and travel companies that make up this sector. It's a reasonable argument for staying diversified and not overconcentrating in the names most levered to that wealth effect continuing uninterrupted.

Canada vs. U.S. Consumer Discretionary: Comparing Different Things

Since the start of the year, consumer stocks have held up despite the macro headwinds and as you can see from the chart below, discretionary stocks on the TSX have outperformed their S&P500 counterparts by about six percentage points. That said, comparing the U.S. and Canadian consumer discretionary sectors head-to-head is a bit like comparing a sports car to a pickup truck. They're both vehicles, but they're built for completely different jobs.

The U.S. sector is dominated by mega-cap names like Amazon, Tesla, Home Depot, McDonald's, Lowe's, and Marriott and the sub-group trades with a price/earnings ratio of about 25. Functionally, it's a proxy for e-commerce, EVs, and big-box retail — a growth sector wearing a "discretionary" label. Performance has been choppy in 2026, roughly flat to slightly negative on a year-to-date basis through mid-year after a strong second quarter.

The Canadian sector, tracked by the S&P/TSX Capped Consumer Discretionary Index is trading at roughly 16 times earnings, which is a real valuation discount to its U.S. counterpart, but it is a very different animal. It's also far more concentrated to boot, as Dollarama and Magna alone make up over 42% of the index. Rather than e-commerce and EVs, this index leans heavily on discount retail, auto parts manufacturing, and quick-service restaurants — Dollarama, Magna, Linamar, Canadian Tire, Restaurant Brands. Performance has been notably stronger, up roughly 7% since the start of the year, driven substantially by Aritzia and the trade-down beneficiaries I mentioned earlier.

So which one is "better positioned"? Honestly, that's the wrong question. The Canadian index's outperformance this year isn't a signal that the Canadian consumer is healthier than the American one — if anything, the data above suggests the opposite. It's a signal that the Canadian index happens to be stacked with companies built to win in exactly the K-shaped, trade-down environment we're in, while the U.S. index is a bet on secular growth trends that have had a tougher year. The valuation gap actually reflects the difference in what you're actually buying more than it reflects which country's consumer sector is cheap or expensive in any absolute sense. The practical takeaway is this: if you're leaning into the Canadian discretionary trade right now, you're effectively making a bet that the trade-down, rate-cut-driven consumer story keeps working. If you're leaning into U.S. discretionary, you're betting more on mega-cap growth reasserting itself, particularly if U.S. rate cuts eventually materialize. Neither is a wrong bet — but they're different bets, and it's worth knowing which one you're actually making.
 

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle

 

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• Boston Consulting Group, “Consumer Spending Is Up, But That Signal No Longer Means What It Once Did” (https://www.bcg.com/publications/2026/canadas-consumer-spending-is-up
• ** U.S. Consumer Spending: Still a K, but That’s OK” — TD Economics, published February 5, 2026, by economist Ksenia Bushmeneva
  https://economics.td.com/us-k-shaped-consumer-spending

 

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