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.
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 (
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 (
- 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 (
Aptiv (
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 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.