Although major U.S. stock indices are repeatedly hitting new highs, the performance within the consumer sector is sharply divided. Wall Street analysts point out that the consumer discretionary sector is becoming one of the weakest market areas in 2026.
This week, both the S&P 500 and the Nasdaq hit record highs, while the Russell 2000 index has risen more than 15% year-to-date. Against a backdrop of strong corporate earnings, higher-than-average tax refunds, and better-than-expected employment data, consumer spending should theoretically receive a boost. However, the actual performance of consumer stocks is far from optimistic. The SPDR Consumer Staples Select Sector Index ETF (XLP), which tracks the consumer staples sector, has fallen more than 1% year-to-date, significantly underperforming the S&P 500 over the same period. The SPDR S&P Retail Index ETF (XRT), tracking the retail sector, has performed even worse, posting a cumulative decline of nearly 8%.
JC O’Hara, Chief Market Technician at Roth Capital Partners, warns that the performance of consumer discretionary stocks relative to the S&P 500 has fallen to its weakest level since late 2022, and investors should quickly eliminate relatively weak stocks in this sector.
The weakness in the consumer sector stems not only from technical factors but also from fundamental pressures. Although U.S. tax refunds this year are higher than last year, the increase is below expectations, while higher gasoline prices and rising commodity costs due to tariffs are eroding residents’ disposable income. Inflation rose in April to its highest level in three years. Nicholas Colas, co-founder of DataTrek Research, stated that the slowdown in U.S. wage growth, with real wage increases after inflation even weaker than before the pandemic, is consistently dampening consumer confidence. The latest survey from the University of Michigan shows that U.S. consumer confidence is near historic lows, lower than during the COVID-19 pandemic and the post-9/11 period.
In contrast to consumer discretionary, as artificial intelligence (AI) brings disruptive changes across industries, holding stocks of companies that produce and sell daily essential physical products is becoming more attractive. Some consumer staples companies are also enhancing their businesses by applying AI technology.
In the AI era, three top consumer staples stocks are worth watching. Wal-Mart (WMT) attracts over 280 million customers weekly, leveraging its extensive reach to gain an advantage in supplier price negotiations, while also using the AI-driven shopping assistant Sparky to boost sales. Costco (COST) saves costs through bulk purchasing, and its private label Kirkland Signature has pricing power; its membership renewal rate exceeds 92%, and it is difficult for AI to disrupt its consumer staples business. Procter & Gamble (PG) produces frequently purchased goods such as Crest toothpaste and Tide laundry detergent, enjoying high brand loyalty, and is applying AI to product development and improving employee efficiency. The key to selecting top investment targets within this sector is to focus on companies that combine essential attributes with the ability to raise prices.
