Mid-2025 has brought a renewed sense of optimism to the U.S. economy, with rising consumer confidence translating into stronger discretionary spending and brighter prospects for related stocks.

In this exploration, we examine the interplay of sentiment, sector dynamics, and practical investor strategies to navigate a market powered by buoyant consumer demand.

Consumer sentiment rebounds in mid-2025

The latest readings from The Conference Board and the University of Michigan reveal a meaningful upswing in consumer outlook. In May 2025, the Present Situation Index rose 4.8 points while the Expectations Index jumped a remarkable 17.4 points, settling at 72.8. Although still below the 80-point mark, this surge reflects cautious optimism following months of uncertainty.

Similarly, the University of Michigan’s sentiment gauge climbed to 60.7 in June, up from 52.2 in May, driven by improved views on employment prospects and future incomes. These shifts were fueled in part by a landmark U.S.-China trade deal and a pause on select tariffs, which together helped lift expectations for business conditions.

Economic backdrop bolstering discretionary growth

This renewed consumer energy is unfolding against a supportive macroeconomic canvas. Key forces at play include:

• Lower inflation and Fed rate cuts boosting purchasing power across households.
• Steady economic growth that defies lingering recession fears.
• Potential regulatory relief and reduced corporate taxes enhancing profit prospects.

Still, risks persist. Tariff uncertainty and evolving trade policies could squeeze margins or shift costs onto consumers. As a result, discretionary stocks remain sensitive to policy headlines and global developments.

Defining discretionary stocks

Unlike staples, discretionary goods and services are non-essential, making demand highly elastic. When consumers feel secure, they indulge in travel, dining, luxury items, and premium entertainment. Conversely, downturns often trigger sharp pullbacks in these categories.

Discretionary sector players span a wide range of industries and business models, including:

• Auto and recreational vehicles
• Apparel, luxury brands, and accessories
• Leisure, travel, and entertainment services
• Home improvement and durable household goods

This diversity creates opportunity: while the broad sector may lag, individual stocks can outperform based on unique strategies and market positioning.

Sector performance: a nuanced picture

Despite stronger consumer sentiment, the consumer discretionary segment has underperformed the broader S&P 500 year to date, ranking as the weakest of the major sectors. Yet this headline understates a more complex reality: within the lagging sector, select companies are shining.

Major ETFs illustrate the mixed performance: XLY is up 1.67%, VCR gained 1.49%, FXD rose 1.21%, and FDIS added 1.46% as of May 2025. These modest gains contrast with double-digit advances in the communication services and technology groups, underscoring the sector’s current struggle to fully capitalize on consumer optimism.

Nevertheless, investors who identify strong fundamentals and differentiated growth drivers in individual names may still capture outsized returns amid a broader rotational backdrop.

Subsector highlights

Certain niches within the discretionary universe are poised to benefit uniquely from today’s conditions:

These pockets illustrate the heterogeneous nature of discretionary demand. Home improvement chains and specialty retailers are enjoying steady traffic, while automakers see increased showroom visits as financing costs remain attractive.

Risks and headwinds

Despite the upside, the path ahead is not without obstacles. Major concerns include:

• Tariff uncertainty driving input cost volatility and consumer apprehension.
• Rising short-term inflation expectations, now at 7.3%, signaling potential consumer pushback.
• Stagnant income growth and five months of weakening job availability assessments.

Investors should monitor incoming data closely, as shifts in employment trends, policy updates, or geopolitical flare-ups could rapidly alter the discretionary landscape.

Strategies for investors

For those seeking to harness this environment, a balanced, research-driven approach is essential. Consider the following tactics:

• Diversify across subsectors to capture both defensive and cyclical strengths.
• Identify companies with strong balance sheets and pricing power to withstand margin pressures.
• Focus on stocks benefiting from secular themes, such as EV adoption or the rise of experiential spending.

By weighing top-down sentiment trends alongside bottom-up fundamentals, investors can align portfolios with the most promising areas of discretionary growth.

Looking ahead: navigating 2025 and beyond

As we progress through 2025, key milestones on the calendar include July’s consumer confidence report and any post-election policy shifts. A sustained economic recovery and stable interest rates would likely propel further gains in discretionary shares.

Conversely, renewed recession fears, policy missteps, or escalating tariffs could stall momentum, underscoring the importance of nimble portfolio management.

Ultimately, the story of 2025’s discretionary rally will hinge on the delicate balance between consumer optimism and real-world risks. Investors who remain vigilant and disciplined stand to benefit from sectors that thrive when confidence is high.

By understanding the nuanced interplay of sentiment, macro forces, and company-specific drivers, market participants can chart a course through this dynamic environment and potentially unlock valuable opportunities.