Consumer Discretionary Is On Sale. Is Anyone Buying?

Everybody loves a good deal, but investors are wary of the markdown on consumer discretionary stocks. 

Down about 6%, consumer discretionary has been this year’s worst-performing sector so far. Despite a recent positive retail sales report and a few days of strong inflows into sector-based exchange-traded funds, the broad consensus is that the sector faces an uphill battle. 

“The consumer discretionary sector is at a bit of a crossroads, only because you still see strong economic growth and supportive, overall healthy labor markets,” said Matt Bartolini, global head of research strategists at State Street Investment Management. But wage growth hasn’t kept pace with job gains, consumer prices remain stubbornly elevated and the Fed’s recent rate hike adds to the pressure. “It would be hard to say, given that macro backdrop, that this is, I don’t want to be so hyperbolic, but a falling knife worth the catch.” 

Prime Suspect

State Street’s Consumer Discretionary Select Sector SPDR ETF (XLY) is the largest fund in the sector, at about $21 billion, and is down a little more than 5% this year. The fund is top heavy, with Amazon and Tesla making up about 40% of the fund’s weight, and while Tesla’s stock is down about 14% year to date, Amazon’s performance (up about 12% this year) is holding up the fund. “You almost have to sort of carve out Amazon from the broader trends,” Bartolini said. “Six of the nine industries within consumer discretionary are going to have or have had their earnings growth expectations for 2027 be revised lower over the last three months … which should maybe give some indication of what the broader sector might be doing outside of a single name.” 

Other funds covering the sector include: 

• The $413 million Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD), which is down about 6% this year, per ETFDb data. 
• Pure retail funds are doing a little better, with the State Street SPDR S&P Retail ETF (XRT) down about 1% and the VanEck Retail ETF (RTH) up almost 3%. 

On the Xly: XLY had two days with inflows of about $600 million each this month (though it did also have a day with $670 million in outflows). There are a couple of plausible reasons for this. “The new retail sales report could have been inspiring some more flows to go into it at these lower prices,” said Roxanna Islam, head of sector and industry research at VettaFi. “People are starting to read a little bit more into the economy and trying to think of when the consumer can actually flip.” But Bartolini suggested that it could also have been a trading play, with investors shorting the fund in anticipation of the rate hike. 

Regardless, the switch hasn’t yet flipped for consumers. “There’s certainly a case to be made for a turnaround,” said Brian Paoli, research analyst for Morningstar. “It’s too soon to tell … but I wouldn’t be surprised if we start to see more inflows into the consumer discretionary space.”