While the S&P 500 continues its sizable rally with an almost 15% gain this year, the index's consumer discretionary sector has lagged, rising less than 5% over that nearly six-month stretch.

Hindered by depleted savings levels, uncertainty over the future of the domestic jobs market, and moderating but still relatively high inflation, consumers are broadly struggling, and the consumer discretionary sector has performed the worst of any sector outside real estate in 2024.

With consumer confidence remaining well below pre-pandemic levels, the consumer discretionary sector will likely continue to lag the broader index as the Federal Reserve moves to ease monetary policy, potentially later this year.

"The sector has seen its best days for this bull market," said Paul Schatz, president of Heritage Capital. "With credit card and auto delinquencies popping and rates still high, the consumer is teetering."

Pandemic lag stretches on

The underperformance of the consumer discretionary sector, a collection of companies selling nonessential goods and services, has been ongoing for nearly four years as the pandemic upended American spending and views of the economy.

The sector is up about 19% since mid-October 2020, compared to the nearly 60% rise in the broader S&P 500.

The sector is likely to continue to lag, even as the Federal Reserve moves to ease monetary policy and begin cutting interest rates potentially later this year.

"Even if consumer sentiment strengthens and inflation and rates go down, the consumer is still fairly tapped when unemployment is percolating," Schatz said.

Retail stocks have been "one of the most disappointing pockets of the market these past few years," said Callie Cox, chief market strategist at Ritholtz Wealth Management.

Still, the economy should be somewhat supportive of a consumer discretionary rally with unemployment still hovering around 4% and the odds of a recession still somewhat low.

"But there are a lot of little stories holding the group back," Cox said.

For one, Tesla Inc., which makes up roughly 38% of the sector's total weight, has struggled mightily, falling nearly 27% since the start of the year.

In addition, goods retailers have suffered a housing sector frozen by higher rates. Many services retailers, meanwhile, are thriving.

"Sure, consumers are spending money, but they're being selective about their purchases," Cox said.

Consumer confidence

The Conference Board reported June 25 that its consumer confidence index fell from May to June to near its lowest levels since summer 2022 when inflation was close to its highest levels since the early 1980s and the Fed had begun aggressively hiking rates.

Delinquencies on credit cards have reached the highest levels in a dozen years, auto loan delinquencies are on the rise, and Americans are saving far less than they were pre-pandemic as inflation remains elevated.

This will all likely continue to weigh on the consumer discretionary sector, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

"Until you can see a clear reacceleration of economic activity, consumer discretionary is going to continue to be a relative laggard compared to the S&P 500," Schulze said.