Most investors are pretty up-to-speed on how the AI boom contributed to supersized gains in the tech sector in the second quarter. Heavily-weighted stocks such as Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT), Nvidia Corp. (NASDAQ: NVDA), Broadcom Inc. (NASDAQ: AVGO) and Adobe Inc. (NASDAQ: ADBE) posted double-digit price increases.
But the consumer discretionary sector, whose most heavily weighted stocks are Amazon.com (NASDAQ: AMZN), Tesla Inc. (NASDAQ: TSLA) and Home Depot Inc. (NYSE: HD) finished the second quarter with a gain of 13.55%. You can track broad sector performance using the Consumer Discretionary Select Sector SPDR Fund (NYSEARCA: XLY).
Some investors have the obviously mistaken belief that consumer discretionary is doomed in an era of high inflation, but the sector’s performance in the quarter is a reminder that looking at the actual data is always better than basing investment decisions on an opinion or panic-stricken financial TV anchors.
Given the strong showing of consumer discretionary in the second quarter, does that mean it’s setting up for further gains in the second half of 2023?
Investor Money Flowing Into Consumer Discretionary
Let’s start with the money flows: Investors have been piling into consumer discretionary in recent weeks, and the sector outperformed the broader S&P 500 on a one-month and three-month basis.
Trading volume tells a story worth following, to get a sense of where sectors and the broad market may be headed: Although the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) advanced by a healthy 6.09% in June, that gain came in slightly lower-than-average volume. That could be an early warning sign that the rally is running out of steam, at least while stocks digest some of the recent gains.
However, the XLY ETF returned 12% in June, in volume 4% heavier than normal. Meanwhile, the rally in tech slowed, with the Technology Select Sector SPDR Fund (NYSEARCA: XLK) returning 5.83 in June, down from May’s 8.92% gain. Volume in the XLK was up 2% in June.
Sector Rotation In The Works?
This suggests some sector rotation may be in the works, which wouldn’t necessarily be a surprise. But keep in mind: A pullback after a big rally isn’t at all unusual, and doesn’t have to mean the market is crashing. Historically speaking, this year is likely to end with gains in the S&P, given that a down year in the index is almost always followed by a year with positive returns.
All of this bodes well for consumer discretionary. Contrary to the doom-and-gloom thesis that shoppers are keeping their cards in their wallets, revenue at Amazon.com has continued to grow. It’s becoming clear that consumers are forking out more in some categories than others.
For example, Home Depot saw a 4% sales slowdown in the most recent quarter. Rival Lowe’s Companies Inc.’s (NYSE: LOW) revenue skidded by 6%.
Cruising Into Profitability
But people are still driving new Teslas off the lot, and in a development that not many would have predicted, the top three gainers in the second quarter were big cruise lines. Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH) and Royal Caribbean Cruises Ltd. (NYSE: RCL) are expected to sail back into profitability this year, while Wall Street sees that happening for Carnival Corp. & plc (NYSE: CCL) in 2024.
Other good bellwethers for the health of consumer discretionary include Chipotle Mexican Grill Inc. (NYSE: CMG), which is expected to grow earnings by 35% this year, and Lululemon Athletica Inc. (NASDAQ: LULU). The latter is based in Canada, so not eligible for admission to the S&P 500, but analysts are eyeing 18% earnings growth as consumers shell out for the company’s athleti-leisure fashions, which are pricier than a pair of yoga or workout pants that you could pick up at Walmart Inc. (NYSE: WMT).
There are certainly mixed signals when it comes to consumer optimism, and what goods people are willing to spend on. When it comes to staples, Target Corp. (NYSE: TGT) has said customers are gravitating toward its private-label grocery brands as they focus on needs versus wants. A blog post from consulting firm Deloitte, “State of the US consumer: June 2023: Financial well-being sentiment recovers from inflation woes,” notes that fewer consumers are citing concerns around their level of savings, worsening financial situations, and fewer are planning to delay large purchases.
Consumers Anxious About Their Jobs
However, the Deloitte study also pointed out that the number of workers feeling anxious about their employment situation has risen.
The trend to continue watching is consumers tightening their belts on staples, but continuing to spend on luxury or leisure items.
In addition to pent-up demand for cruises, diners continue flocking to fast-casual restaurants like Chipotle. Even as restaurants increase prices to keep up with inflation, consumers have defied expectations and continue to spend on meals outside the home.
For the moment, based on analyst expectations and what appears to be an easing in inflation, consumer discretionary looks likely to grow and end the year as a leading sector.
