Consumer stocks made a comeback in June - but U.S. households are still feeling the pinch

By Isabel Wang

The rebound in consumer-discretionary stocks is more indicative of sector performance than the well-being of U.S. households, analyst says

Consumer-discretionary stocks bounced back in June, raising hopes of a recovery after their tumultuous start to 2024. But market analysts warn that a comeback in this sector could belie underlying consumer weakness amid ongoing concerns over the health of American households.

In June, stocks with high exposure to nonessential consumer goods and services booked their best month since February. The S&P 500's consumer-discretionary sector XX:SP500.25, up 4.8% in June, was the third-best performer among the large-cap benchmark index's 11 sectors, according to FactSet data.

The sector also hit a new 52-week closing high on Thursday - before giving back much of its weekly gains on Friday, as shares of Nike Inc. (NKE) tumbled after the athletic-wear giant dimmed its expectations for the year as it grapples with wobbling consumer demand.

See: These consumer stocks are struggling. What it says about the market and U.S. households.

Consumer-discretionary stocks have trailed the broader market for much of this year. The Consumer Discretionary Select Sector SPDR ETF XLY, up 2% so far in 2024, has been the second-worst performer among a set of funds that track each of the S&P 500's SPX 11 sectors, according to FactSet data.

JJ Kinahan, chief executive officer of IG North America and president of Tastytrade, said the selloff in consumer-discretionary stocks earlier this year was "overdone" as investors digested a mixed bag of quarterly earnings from companies in the sector.

The likes of McDonald's Corp. (MCD) and Starbucks Corp. (SBUX) saw consumers pull back on their nonessential expenses in the most recent quarter due to elevated prices in their day-to-day spending.

However, those inflationary fears have seemed to wane over the past month, with a softer-than-expected May consumer-price index report fueling investor hopes that the Federal Reserve is moving closer to cutting interest rates later this year, Kinahan told MarketWatch in an interview Friday.

In turn, "consumers [won't] stop spending," Kinahan said. "In fact, they may be able to ramp up spending a little bit because there will be more money in the system and it'll be easier to get loans."

Yet the rebound in consumer-discretionary stocks may be more indicative of sector performance than the actual well-being of U.S. households, said Tony Roth, chief investment officer at Wilmington Trust Investment Advisors. "The way we're seeing it really depends on what kind of consumer we're talking about," Roth said.

Lower- and middle-income households have become more selective in the products they purchase and places where they splurge, Roth told MarketWatch on Friday. "They are pivoting to staples away from discretionary," while the spending behavior of "wealthier families" hasn't changed that much, he noted.

"So you're going to start to see a concentration of pain in companies selling discretionary items and services - especially restaurant chains and small businesses - but you're not going to see it as much in [companies in the] air-travel or cruise or luxury-goods industries," Roth said.

See: Super Micro and Nvidia lead the S&P 500 this year. These stocks follow.

Cruise companies and other travel-related stocks led the gains in the S&P 500 consumer-discretionary sector over the past month. Shares of Carnival Corp. (CCL) have popped more than 24% to become the best performer in the sector, followed by a 13.2% advance for Norwegian Cruise Line Holdings Ltd. (NCLH) and an 11.6% surge for Expedia Group Inc. (EXPE), according to FactSet data.

However, those top three performers make up just around 1% of the sector's market-cap-adjusted weight, while shares of tech giants Amazon.com Inc. (AMZN) and Tesla Inc. (TSLA) - which each climbed around 10% in June - have a combined 56% weight in the consumer-discretionary sector.

And when the sector reached a new 52-week closing high on Thursday, only one of its 52 components - Amazon - also hit a 52-week high of its own, according to FactSet data.

"It continues to be a very, very lopsided market overall [in June], and discretionary is no different," Roth said. "You are continuing to see these big companies dominate the economy."

See: July is historically a great month for U.S. stocks. Here's why this year might be different.

Though U.S. stocks slipped on Friday, they still finished the month of June higher - with the Nasdaq Composite COMP recording a nearly 6% monthly advance, the S&P 500 rising 3.5% and the Dow Jones Industrial Average DJIA gaining 1.1%, according to FactSet data.

-Isabel Wang

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06-29-24 0630ET

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