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Consumer discretionary: Fueled by spending

Key takeaways

  • US consumers generally kept spending in 2024, although lower-income consumers felt a greater pinch from still-high interest rates and inflation.
  • In aggregate, the consumer discretionary sector delivered strong gains in 2024.
  • For 2025, the sector may continue to be driven by macro considerations, such as the health of the job market.
  • Certain segments—such as auto suppliers and home-improvement retailers—could benefit if falling interest rates trigger a rebound in big-ticket spending.

Despite pressures from interest rates and inflation, Americans continued to open their wallets in 2024 as the economy generally stayed resilient. This fueled market-beating gains for the consumer discretionary sector, which encompasses companies that sell primarily nonessential goods and services like new cars, home-improvement supplies, and hotel stays.

For 2025, these stocks are likely to continue to rise or fall with the fate of US consumers and the broader economy. If economic growth and the job market remain on track, consumers are likely to keep spending. Plus, further rate cuts from the Fed could help alleviate some of the recent pressures on consumers, freeing up cash or credit for some of the bigger-ticket home-improvement and auto-related purchases they've delayed in the recent high-interest-rate environment.

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2024: Coming off a strong year

Solid US economic growth was a major headline for the sector in 2024, with resilient consumer spending at the heart of the story. Although some worries about rising unemployment cropped up through the year, the job market remained steady. At the same time, wages grew faster than inflation, allowing consumers to start clawing back some of the purchasing power they'd lost to inflation in recent years.

But under the surface was a tale of 2 consumers. Higher-income earners disproportionately drove overall spending—backed by gains in income, new record highs in the stock market, and rises in home equity. Lower-income earners, who have generally been squeezed harder by inflation and high borrowing costs, showed signs of pulling back on nonessential spending like restaurant meals, clothes, and entertainment.

This backdrop gave way to mixed performance among the sector's various industries. For example, home-improvement and auto-parts retailers struggled as consumers delayed housing renovation and improvement projects. On the other hand, the 2 largest constituents in the sector, Amazon () and Tesla (), both experienced strong gains as investors generally favored mega-cap tech-related stocks. And homebuilding stocks rallied on hopes that interest-rate cuts will eventually lead to lower mortgage rates and, in turn, stronger demand for new housing.

As of December 9, the consumer discretionary sector had gained 33.1% in 2024, versus a 26.9% gain for the S&P 500.
Past performance is no guarantee of future results. Consumer discretionary sector performance is represented by the S&P 500 Consumer Discretionary Sector Index. Data as of December 9, 2024. Source: S&P Dow Jones Indices, a division of S&P Global.

Yet as a sector, consumer discretionary delivered strong performance in 2024. Although the sector trailed the market for most of the year, by mid-December a year-end rally had put it on track to potentially best the S&P 500®.

2025: Same economic trends, potentially new government policies

In 2025, I believe sector-level performance will likely continue to be driven by macroeconomic crosscurrents. Lower inflation and further rate cuts from the Fed could benefit the sector, as consumers might be more likely to purchase big-ticket items such as cars or houses. Better still would be if the economy continues to grow, continues to avert recession, and the labor markets remain strong. If the US were to enter a recession and consumers pull back their spending, consumer discretionary stocks could face pressure.

One consideration that may impact many sectors in 2025 could be any policy shifts from the incoming presidential administration and makeup of Congress. At a high level, proposed policies could have mixed impacts on the consumer discretionary sector. Lighter regulation, a lower corporate tax rate, and a tougher stance on retail theft could all provide potential tailwinds if executed upon. Higher tariffs would likely have a negative impact either on US consumers or the US firms that import goods, depending on whether these firms are able to pass these higher costs on in the form of higher prices for consumers.

Fund top holdings1

Top-10 holdings of the Fidelity® Select Consumer Discretionary Portfolio () as of October 31, 2024:

  • 24.1% – Amazon.com Inc. ()
  • 11.3% – Tesla Inc. ()
  • 5.0% – Home Depot Inc. ()
  • 4.8% – Lowe's Companies Inc. ()
  • 2.9% – Hilton Worldwide Holdings Inc. ()
  • 2.8% – TJX Companies Inc. ()
  • 2.5% – McDonald's Corp. ()
  • 2.4% – Booking Holdings Inc. ()
  • 2.2% – DICK'S Sporting Goods Inc. ()
  • 2.0% – Marriott International Inc. ()

(See the most recent fund information.)

Potential value in home and auto categories

With the evolving business cycle in mind, interest-rate-sensitive industries, such as auto- and home-related categories, look interesting. Not only have these groups recently sported attractive valuations, but they have tended to lead the market's advance amid the first signs of lower interest rates because they typically benefit from increased borrowing.

For instance, Lowe's () is the second-largest home-improvement retailer in the US. Although demand for big-ticket discretionary renovations has been soft, most of Lowe's business has been driven by less-discretionary maintenance activity. Plus, the company could be a potential beneficiary of key long-term trends. For one thing, the housing stock continues to grow and age, necessitating greater maintenance activity. Additionally, record home prices and home equity levels could be supportive for improvement and renovation spending. The lock-in effect of homeowners staying in place longer, including older homeowners aging in place, is apt to prompt renovation activity within existing residences. It is also worth mentioning that increasingly severe weather has been contributing to storm damage in the US housing stock, necessitating increased repair activity.

Aptiv ()2 is a supplier of automotive components and software that has significant exposure to the electric vehicle (EV) market and that has historically traded at a hefty valuation relative to peers. But the stock has fallen over the past year on investor concerns about a slowdown in EV adoption. However, I believe much of this fear may be shortsighted, as I think investors have overlooked improvements in the company's cash-flow profile. Over the longer term, EV adoption is projected to eventually swell.3

A focus on stock selection

To be sure, as I look to 2025 there are reasons for near-term caution on the economic and consumer backdrop. While I believe it is important to be aware of the macro environment, my investment process is primarily based on bottom-up fundamental research and an evaluation of the prospects for individual stocks. Fortunately, consumer discretionary is a diverse sector that can offer pockets of attractive valuation in a variety of market environments. Fidelity's research insights can help me uncover those companies with strong risk-reward profiles and long-term growth potential.

Jordan Michaels

Jordan Michaels is a research analyst and portfolio manager in the Equity division at Fidelity Investments.

In this role, Mr. Michaels manages Fidelity Select Consumer Discretionary Portfolio, Fidelity Advisor Consumer Discretionary Fund, Fidelity VIP Consumer Discretionary, Fidelity Select Construction and Housing Portfolio, the consumer discretionary sleeve of Fidelity and Fidelity Advisor Stock Selector Large Cap Value Funds, and covers specialty retail.

Prior to joining Fidelity in 2008, Mr. Michaels was an intern at GID Securities. He has been in the financial industry since 2006.

Mr. Michaels earned his bachelor of arts in economics from Brandeis University. He is also a CFA® charterholder.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. 1. Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown. 2. Fidelity® Select Consumer Discretionary Portfolio (FSCPX) held a position of 1.755% in this stock as of October 31, 2024. 3. “Global EV Outlook 2024: Outlook for electric mobility,” International Energy Agency, accessed on Nov. 18, 2024, www.iea.org/reports/global-ev-outlook-2024/outlook-for-electric-mobility.

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References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

The consumer discretionary industries can be significantly affected by the performance of the overall economy, interest rates, competition, consumer confidence and spending, and changes in demographics and consumer tastes.

The S&P 500 Consumer Discretionary index comprises those companies included in the S&P 500 that are classified as members of the consumer discretionary sector. The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.

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