Loan Delinquencies Edge Lower in Q2, but Some Remain at Very High Levels. Here's What It Means for Investors.

Economic data continues to send mixed messages. That's the takeaway from the Federal Reserve's second-quarter snapshot of U.S. consumer loans anyway. The total number of loans that were delinquent by 90 or more days fell from 2.91% a year earlier to 2.57% in the second quarter of this year, down from Q1's figure of 2.83%.

There are pockets of problems, however. Mortgage delinquencies edged measurably higher -- again -- as did past-due auto loans. Indeed, car loan delinquencies are showing signs of serious trouble, moving back within sight of multiyear highs.

There's an important nuance that's not readily evident in the Fed's main numbers, however. That is, subprime loans (loans granted to borrowers with lower credit scores) account for a significant share of the recent weakness. For instance, the Fed's data indicates that while the second quarter's subprime mortgage loan delinquency rate of 1.86% was a hair lower than Q1's 1.88%, the rate is still near a multiyear high. As the Mortgage Bankers Association's vice president of industry analysis, Marina Walsh, recently noted, while "mortgage delinquencies decreased [sequentially] slightly across all loan types in the second quarter of 2026 ... the broader trend is that both delinquencies and foreclosures have increased over the past year."

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Separately but simultaneously, although bond rating firm Fitch reported that last quarter's subprime car loan delinquencies fell from 6.5% at the end of 2025 to 5.8% as of the end of Q2, its recent analysis also says, "July, however, showed renewed deterioration, particularly in subprime," attributing the delinquency divergence to "affordability pressures weighing disproportionately on lower-income, highly leveraged borrowers in a K-shaped economy." Moreover, Fitch "expects prime and subprime auto loan ABS [asset-backed securities] performance to weaken further in the second half of this year, driven by tariff uncertainty, oil-price volatility tied to the U.S.-Iran conflict, and a cooling labor market, with subprime remaining under greater pressure than prime."

And this is nothing for investors to ignore.

A tale of two kinds of consumer

Last quarter's delinquency data underscores the argument that -- just as Fitch's report suggests -- the U.S. is experiencing a K-shaped economic recovery. In other words, rather than a rising tide lifting all boats, affluent households are adjusting to rising inflation and higher interest rates well enough, while lower-earning households and consumers are increasingly struggling.

And we were already seeing hints of this dynamic. Take American Express' (NYSE: AXP) second-quarter results as an example. The credit card company largely serving a more affluent customer base saw year-over-year revenue growth of 9% -- the highest in three years -- more or less matched by profit growth. Chief Financial Officer Christophe Le Caillec specifically highlighted this during Q2's earnings conference call, noting that card-based retail spending, restaurant spending, and travel-related spending all grew at an even faster clip. Yet loan delinquencies didn't budge, and remain below levels seen during the COVID-19 pandemic. That's in contrast to credit bureau TransUnion's observation that "a growing subprime population largely drove the increase" drove the second quarter's 90-day credit card delinquencies.

We're seeing similar red flags on other fronts, too. Fast-food restaurant chain McDonald's (NYSE: MCD) Q2 sales growth fell short of expectations largely because, in CEO Chris Kempczinski's words, "Although we've restored our overall value and affordability leadership, our restaurant level results show that execution was inconsistent across the system." That underscores the economic sensitivity of its core, value-conscious customer.

Brick-and-mortar discount retailer Walmart (NASDAQ: WMT) misfired last quarter as well. U.S. same-store sales growth of 2.6% fell short of the 3.8% year-over-year growth rate analysts were expecting.

Interestingly, used-car dealers Carvana (NYSE: CVNA) and CarMax (NYSE: KMX) aren't showing any serious signs of trouble yet, despite their dependence on consumers' ability to obtain credit. That trouble could be brewing, though. Data from industry research outfit Cox Automotive indicates that subprime loans' share of the nation's auto lending market fell every month in Q2, from March's 19.5% to June's 16.6%, with subprime lenders simply rejecting more of these increasingly risky loan applications.

An extension of this headwind could prove particularly problematic for Carvana, which counts sales of automobile loans to third-party investors as a key component of its per-car profit. Again, Fitch expects automobile-loan-based asset-backed securities to underperform for the remainder of this year, largely because their underlying subprime borrowers are facing a growing amount of economic hardship that's making it tougher to repay these loans. In this vein, know that online bank Ally Financial (NYSE: ALLY) also manages a sizable subprime car loan portfolio that could be vulnerable.

Expect more of the same

Only time will tell whether this dynamic will persist into the foreseeable future, and if so, to what degree.

Clearly, not much has changed with or for the economy since the second quarter of the year, though. Inflation is still uncomfortably high, the job market is less than solid, and paychecks are relatively weak, while corporate and consumer confidence is low. The reasons for the K-shaped economic recovery that were clearly in place in Q2 appear to still be in place now. Investors shouldn't be surprised to see at least a similar outcome and impact on companies' performances, if not the exact same ones.

American Express is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express, CarMax, and Walmart. The Motley Fool recommends the following options: long January 2028 $320 calls on McDonald's and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.