By Jacob Sonenshine

Signals are piling up against consumer discretionary stocks.

The Invesco S&P 500 Equal Weight Consumer Discretionary Exchange-Traded Fund owns an even amount in dozens of stocks in the retail, apparel, travel, restaurant, housing, and auto industries. It is a truer gauge of the sector versus a more widely cited ETF, which is heavily weighted toward Amazon.com and Tesla.

The Invesco equal-weighted ETF is down 13% from its record high hit in January, while the S&P 500 has risen to new highs this month, showing that most consumer discretionary stocks have performed poorly.

The fund ran into trouble in late February, when it started to aggressively decline. Right now, it is near its roughly $52 low from that drop, and the likelihood of a drop below that level is building.

The next clear level of buying support is at $46, where it bottomed during the April 2025 tariff scare. That would bring the fund down 15% from its current level.

The most pressing issue emanates from Iran, which was the late February catalyst for the shaky performance. The oil price surge lifted energy and other costs such as transportation of goods, pressuring gross profit margins for many companies. This is particularly problematic for consumer discretionary companies -- those that sell nonessential goods ands services. Discretionary companies are up against a consumer that is becoming choosier about where to spend money amid higher inflation and an uptick in interest rates.

The kicker is that several areas of the sector are highly competitive. Many companies can't lift prices to fully offset the costs. Put it this way: The producer price index's rise in April was a bit more than two percentage points faster than the consumer price index's rise, meaning firms, many of which are consumer companies, saw a drop in margins that month. Looking ahead, the overall inflation, which is well above the Federal Reserve's 2% target, could hurt demand, especially if it causes the Fed to lift rates.

That is why most discretionary companies are signaling concern about sales and margins. Only two discretionary companies mentioned a positive impact from higher oil on first-quarter earnings calls, while the rest mentioned negative impacts or struck a neutral tone, according to data from Trivariate Research's Adam Parker.

That has prompted analysts for companies in the ETF to revise 2026 earnings estimates, in aggregate, down a few cents since late February, according to FactSet. Meanwhile, overall S&P 500 earnings forecasts are up, with higher estimates in many sectors -- but not discretionary.

At this point, the market is right to wonder if discretionary's earnings expectations, which haven't dropped all that much yet, could fall even more. Inflation is unresolved, the job market is growing slowly, and elevated rates can take a while to fully hurt consumer spending.

"We continue to recommend an Underweight in consumer discretionary, as we suspect [earnings] estimate achievability will be below average for the sector," Parker writes.

So it behooves investors to sell some shares of companies in the ETF. The ones that have recently outperformed the sector are the best sell candidates. If the whole group falls, and the relatively strong performers don't consistently live up to higher expectations that they can produce above-average profit growth, they could drop harshly.

So we scoured for stocks in the fund that have recently hit what look like the strongest outperformance versus the sector.

Ralph Lauren, Royal Caribbean Cruises, General Motors and Ford Motor have all outperformed in the past two years. Their share prices as ratios to the fund's price all touched two-year highs either this year or over the summer, underperformed the fund since those points, but have ratios that remain at the high end of their two-year ranges, according to FactSet. They look vulnerable to declines, so why not take profits now?

Investors can use the cash to buy other assets. Those looking to lock in safe assets could buy Treasury bonds that yield over 4%, which is higher than inflation.

Aggressive investors can look at a host of more attractive areas.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 15, 2026 11:48 ET (15:48 GMT)

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