The S&P 500 is having a great year. Consumer discretionary stocks are not invited to the party.
The ratio between the S&P 500 Consumer Discretionary sector and the broader index has sunk to its lowest level in 20 years, a striking divergence that reveals just how lopsided this market rally has become. While the S&P 500 recently crossed 6,600 for the first time, marking a 36% surge from its April 2025 low, traditional consumer-facing stocks have been left treading water, or worse.
What’s dragging consumer stocks down
The culprits are familiar and compounding. Persistent inflation, elevated interest rates, tariff policy adjustments, and a meaningful pullback in spending among lower-income households have all conspired to weigh on the sector.
The Consumer Discretionary Select Sector SPDR ETF, known by its ticker XLY, has posted roughly a 10% trailing one-year return by mid-May 2026. That sounds acceptable in isolation. But context matters. The S&P 500’s 36% rip from its April 2025 trough makes that 10% look like a participation trophy.
It’s worth noting that the sector hasn’t collapsed in absolute terms. Stocks in the consumer discretionary space did rise in 2025. The problem is relative performance, and it’s been ugly on both a multi-quarter and multi-year basis.
The sector’s weakness isn’t happening in a vacuum. Tariff changes have injected uncertainty into supply chains and pricing for consumer goods companies. Higher borrowing costs have made big-ticket purchases, think cars, appliances, home furnishings, less attractive for households already squeezed by inflation. And lower-income consumers, who historically drive a significant share of discretionary spending, have been disproportionately hammered by the cumulative effect of years of above-trend price increases.
Why the S&P 500 doesn’t care
The index’s march to 6,600 has been propelled by advances in artificial intelligence and the tech mega-caps that dominate its weighting. When a handful of trillion-dollar companies are posting enormous gains, the index can look spectacular even if entire sectors underneath are quietly deteriorating.
The divergence also raises a structural question about what the S&P 500 actually measures anymore. If the index can hit all-time highs while the sector most closely tied to everyday consumer activity sits at a two-decade relative low, the index is telling you more about AI sentiment than about the real economy.
What this means for investors
The 20-year relative low in consumer discretionary is the kind of signal that attracts two very different types of investors. Contrarians see deep value and an eventual reversion to the mean. Momentum followers see a sector to avoid until the trend changes.
The key indicators to watch are inflation trajectory, interest rate decisions, and consumer confidence surveys. A meaningful shift in any of these could be the catalyst that breaks the 20-year downtrend in relative performance.
There’s also a risk that many investors aren’t considering. If consumer weakness eventually spreads to the broader economy, the S&P 500’s tech-driven strength could prove fragile. Consumer spending accounts for a massive share of GDP. A sector at a 20-year relative low isn’t just a stock market curiosity. It’s a warning sign about the foundation underneath the rally that everyone is celebrating.