Rising tensions in the Middle East are increasingly dampening consumer sentiment, resulting in weakening confidence levels. Per the University of Michigan's Surveys of Consumers, U.S. consumer sentiment declined in March, with the Index of Consumer Sentiment falling 5.8% from February and 6.5% from a year ago.

For consumers, the year started on a weak footing, and there is little reassurance for both households and investors amid elevated volatility. The S&P 500 Index has fallen 4.78% over the past month and 5.08% year to date. The CBOE Volatility Index has climbed 66.87% year to date, reflecting rising market turbulence and growing consumer jitters.

Escalating market volatility and increasing economic headwinds are straining consumer finances. As confidence weakens, consumers are becoming more cautious and reassessing discretionary spending. The short-run economic outlook dropped 14%, and year-ahead personal finance expectations fell 10%, while longer-term expectations saw comparatively milder declines, according to the survey.

Rising Gasoline Prices Add to Consumer Woes

Per data from GasBuddy, as quoted on Reuters, amid the ongoing turmoil in global energy markets, driven by Middle East conflicts, the U.S. national average gasoline price rose above $4 per gallon on Monday for the first time in more than three years. This level, last seen in August 2022 after Russia’s invasion of Ukraine, is often viewed as a psychological tipping point for consumers.

Further increases in crude oil could push pump prices even higher. Per a Reuters poll, as quoted on the abovementioned Reuters article, 55% of respondents experienced at least a “somewhat” negative impact from rising fuel costs, while 21% reported a “great deal” of financial strain.

According to JPMorgan economists, as quoted on another Reuters article, surging gasoline prices could start eating into the benefits of tax cuts under the One Big Beautiful Bill Act (“OBBBA”), especially if the national average nears $5 a gallon, a mark already crossed in California and Washington. Per the economists at JPMorgan, even if elevated gasoline prices do not fully negate the benefits of the OBBBA, they would nonetheless reduce real spending power relative to pre-conflict projections.

Even After Conflict, Inflation Could Dominate Risks

Even if optimism grows about an end to the Middle East conflict, its aftereffects are unlikely to offer consumers much relief. The S&P 500 Index rose about 2.91% on Tuesday, while the volatility index fell 10.17% over five days and 2.02% over the past day, suggesting markets are pricing in optimism around a potential end to the conflict.

However, energy prices are expected to stay elevated well beyond the conflict, given the lasting damage to regional energy infrastructure. As a result, inflation could emerge as the primary headwind for consumers.

With consumer confidence already down from the year-ago levels, as highlighted by Surveys of Consumers from the University of Michigan, rising inflationary pressure ahead could complicate the outlook for consumers. As per the survey, year-ahead inflation expectations increased from 3.4% in February to 3.8% this month, the biggest monthly jump since April 2025.

From Inflation to Recession: Risks Are Rising

As per Wall Street analysts, as quoted on Yahoo Finance, the likelihood of a U.S. recession is rising, as elevated oil prices amid the Middle East conflict begin to put pressure on economic growth. Gregory Daco, EY-Parthenon chief economist, estimates a 40% recession probability, noting that downside risks have risen materially, as quoted on the abovementioned article.

According to Mark Zandi, chief economist at Moody's Analytics, as quoted on USA Today, prior to the onset of the war, the firm’s model had already lifted the likelihood of the United States entering a recession over the next 12 months to an “uncomfortably high” 49%.

Near-Term Pain, Long-Term Gain?

Consumers remain cautious in the near term, but their pessimism around the Middle East conflict does not seem to carry into the longer-term outlook. According to the University of Michigan’s survey, long-run inflation expectations eased to 3.2%, still hovering within the narrow 2.8%–3.2% band seen in 2024.

Per the director of the University of Michigan's Surveys of Consumers, Joanne Hsu, consumers currently do not appear to expect recent economic disruptions to have lasting effects, though this outlook could shift if the Iran conflict drags on or if higher energy prices feed into broader inflation.

ETFs to Consider

Below, we have highlighted a few funds that investors may consider increasing exposure to as consumer confidence declines.

Consumer Staples ETFs

The fall in consumer confidence could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Investors can consider Consumer Staples Select Sector SPDR Fund (XLP Quick QuoteXLP - Free Report) and iShares U.S. Consumer Staples ETF (IYK Quick QuoteIYK - Free Report) .

Utility ETFs

As a low-beta sector, utilities are relatively shielded from market volatility, making them a defensive investment and a safe haven during economic turmoil. Investors often turn to utilities during downturns due to the steady demand for these companies' services. Investors should gain from funds like Utilities Select Sector SPDR Fund (XLU Quick QuoteXLU - Free Report) and iShares U.S. Utilities ETF (IDU Quick QuoteIDU - Free Report) .

Healthcare ETFs

The healthcare sector is non-cyclical, providing a defensive tilt to the portfolio amid market turmoil. Given its relative resilience in low-growth and uncertain environments, the sector often attracts increased investor interest in such phases. Investors can look at funds like Health Care Select Sector SPDR Fund (XLV Quick QuoteXLV - Free Report) and iShares U.S. Healthcare ETF (IYH Quick QuoteIYH - Free Report) .

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response, providing a buffer against potential headwinds. Investors can look at funds like iShares MSCI USA Quality Factor ETF (QUAL Quick QuoteQUAL - Free Report) and Invesco S&P 500 Quality ETF (SPHQ Quick QuoteSPHQ - Free Report) .