This isn’t the perfect climate for consumer spending, particularly the discretionary side. There’s tariff inflation, the expiration of the Affordable Care Act credits, and spiking energy prices due to conflict in Iran.
Alone, any one of those factors could spook investors regarding consumer discretionary stocks. Combined, those issues could compel market participants to eschew the consumer cyclical sector in wholesale fashion. Fortunately, it’s not all doom and gloom for consumer discretionary equities, and there may be near-term upside catalysts for the group.
If that scenario materializes, ETFs such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) could benefit. Those aren’t dedicated consumer cyclical funds, but these ETFs are overweight that sector in significant fashion, relative to other broad market ETFs. In fact, consumer discretionary is the second-largest sector allocation in QQQ and QQQM.
Going Shopping With QQQ
Consumer cyclical stocks, including QQQ/QQQM holdings, could find support over the near-term because it’s tax season. Signs are encouraging, as data indicate refunds are increasing, indicating some benefits are being derived from the One Big Beautiful Bill Act (OBBBA).
“Among these were deductions for overtime and tips, a new senior deduction, deductibility of car-loan interest, an increased State and Local Tax (SALT) cap and enhanced child tax credit,” observed Morgan Stanley. “Among these were deductions for overtime and tips, a new senior deduction, deductibility of car-loan interest, an increased State and Local Tax (SALT) cap and enhanced child tax credit.”
Important to the thesis of tax season providing a spark to consumer discretionary stocks is the point that tax changes could benefit a wide range of prospective shoppers, potentially lifting QQQ/QQQM consumer holdings along the way.
“Deductions for tips and overtime are likely to benefit mainly middle-income consumers, while the increase in the SALT cap should favor mostly high-income consumers and homeowners. The senior deduction could further support older middle-income consumers,” added Morgan Stanley.
There are also industry-level considerations, some of which could support QQQ/QQQM consumer discretionary components.
“Among retailers, hardliners—or sellers of non-apparel and often boxed merchandise, such as electronics, appliances and housewares—are most likely to increase sales. Some apparel and footwear retailers should also lead performance,” concludes Morgan Stanley. “Restaurant demand could also have a significant boost, with casual dining being the clearest beneficiary from the potential increase in discretionary spending.”
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