By Teresa Rivas

Consumer-discretionary stocks may be in for a difficult stretch.

Though the S&P 500 closed at record levels twice last week, it ended with a loss of 1.7%, dragged down in large part by worry about whether shoppers remain willing and able to spend. On Thursday, Walmart issued conservative financial guidance for the full year, leading to concern that households were tightening their belts. On Friday, the February reading of the University of Michigan's consumer sentiment added to the worry, coming in lower than expected as a result of continued inflation and uncertainty about tariffs.

Retail sales for January were disappointing as well. While many argue that blizzards and wildfires kept home people who had already splurged at Christmas, last week's data points indicate that the figure for February won't rebound as strongly as hoped.

Darkening the picture are the chaotic mass firings, or threats thereof, sweeping through the federal government. Job loss is the main reason many people slash their spending.

"The White House may not be aware, but consumer sentiment has taken a -7-point nose-dive since the November election," notes Rosenberg Research's David Rosenberg in a research note on Monday. "[W]e are now up to one-in-five Americans fearing a job loss in the next five years and they surely will not be going cap in hand to their employer for a salary bump."

Expectations that people will prioritize needs over wants are playing out in the stock market. Ordinarily stodgy consumer-staples stocks soared, even those of packaged-food companies that offered little reassurance for investors at the annual meeting of the Consumer Analyst Group of New York.

But the consumer discretionary sector has been the worst performer in the S&P 500 in 2025. On Monday, it was on track for its lowest close since November.

Trivariate Research founder Adam Parker believes that the market could see a correction in the first half of the year, given an overwhelming level of bullishness among strategists and uncertainty about the effects of Trump administration policies. Partly because of Walmart's forecast, he is particularly concerned about the outlook for consumer discretionary stocks.

Yes, it has been a bad move to bet against the U.S. consumer -- and the stocks that benefit from their shopping -- in recent decades. But at least in the near term, Parker believes that persistent inflation limits the scope for the Federal Reserve to cut rates, and that that represents a headwind for spending. Discretionary stocks are among the potential victims.

Nor are the economic data encouraging. "[W]hile the aggregate consumer data on jobs, wages, and credit card delinquency metrics, to name a few well-followed trends, may still look robust in absolute terms, they are generally deteriorating," he wrote Sunday. "Government sector layoffs, potential deportations, and a slowing economy likely cause some changes to consumer behavior that are not all in the prices."

That said, it isn't as if the entire sector has been hammered, or is at risk of significant declines. Companies such as Hasbro, Ralph Lauren, Starbucks, and Tapestry are up more than 20% this year, and some of that momentum is likely to continue.

Upscale names like Tapestry and Ralph Lauren are benefiting as the wealthiest Americans keep on spending. Companies such as TJX Cos. could benefit from shoppers -- even millionaires -- bargain hunting at stores like TJ Maxx and HomeGoods. And for all the concern about Walmart, it has generally outperformed when consumers pull back, as seen during the 2008-2009 financial crisis and the pandemic.

Overall, it isn't time to panic yet, but there's no doubt that the average shopper is facing more pressure. Staples stocks' strength relative to discretionary shares makes the point.

In terms of the latter, "the crowd is caught too bullish, and expectations are far too high," as the Bear Traps Report's Larry McDonald put it. Stocks are falling as investors catch on.

Write to Teresa Rivas at teresa.rivas@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.

(END) Dow Jones Newswires

February 24, 2025 14:45 ET (19:45 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.