Capital One's Earnings Miss Raises a Bigger Question: Is the Consumer Finally Cracking?

With the heights of earnings season finally past, investors and analysts are turning to analyzing what the first-quarter results say about the market and the economy. Chief among these messages? Most of the major tech companies involved in artificial intelligence (AI) are still firing on all cylinders.

However, evidence of the so-called "K"-shaped economy continues to mount. Subprime credit card specialist Capital One Financial's (NYSE: COF) Q1 earnings miss, for example, suggests that the average consumer is under increasing financial strain.

And it's not just Capital One saying it.

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Red flags for some

Capital One turned $15.2 billion in revenue into an adjusted per-share profit of $4.42 during the three months ending in March, down 2% from the year-earlier top line, when the company reported earnings of $4.06 per share. Worse, analysts were expecting sales of $15.4 billion and a bottom line of $4.55 per share.

Perhaps the real red flag in Capital One's Q1 numbers, however, is the portion of its loan portfolio that the company expects to sour. The credit card issuer's loan-loss provision came in at $4.07 billion versus estimates of only $3.77 billion, well up from the year-ago comparison of $2.37 billion. Charge-offs also jumped from $2.74 billion in Q1 2025 to $3.85 billion for the first quarter of this year.

Cardholders are spending more, but even more of this spending is ultimately turning into bad debt.

Body of evidence

If this had been just a one-time stumble from only Capital One, it might be dismissible.

It's not just a one-off, though. This is the second consecutive quarter that Capital One missed analysts' earnings expectations. Pizza powerhouse Papa John's (NASDAQ: PZZA) also missed last quarter's revenue and earnings estimates, with a domestic same-store sales dip of 6.4% indicating that not even the usually resilient pizza business is immune to the economy's current challenges.

Although it topped last quarter's expectations, McDonald's (NYSE: MCD) relied heavily on its value meals during this stretch. CEO Chris Kempczinski made a point of saying that the current economic backdrop is "certainly not improving," adding that "it may be getting a little bit worse."

We're seeing the same message in other areas, too. Credit bureau TransUnion, for instance, reports that the number of credit card holders 90 or more days late on their payments inched up to nearly a two-year high of 2.53% in Q1. That's still not catastrophic. But, with total credit card balances at a record high of $1.12 trillion at a time when average per-borrower credit card balances have grown for four consecutive years, consumers are arguably at their breaking point.

Not all, but enough

It's not every consumer, for the record. Rival card company American Express (NYSE: AXP) reported 15% earnings growth on a 9% improvement in last quarter's billed business. This is largely because it serves more affluent consumers who remain in a position to spend more, and to service their debts. Notably, AmEx's loss provisions aren't suddenly soaring.

Just don't lose sight of the bigger picture. All businesses eventually sell goods and services to consumers, or sell goods and services to consumer-facing companies. If enough consumers are sidelined, it will affect all corporations' top and bottom lines sooner or later.

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. The Motley Fool recommends Capital One Financial and 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.