Inflation and the threat of recession kept the consumer discretionary sector at the top of two out of three measures of public-sector risk in the first quarter, according to an S&P Global Market Intelligence analysis.

Short-sellers concentrated their bets for stock-price declines in the consumer discretionary sector, which, as of mid-March, had the highest portion of shorted shares out of all outstanding shares. Executives across the sector also tempered expectations for future performance with six companies lowering corporate guidance in the first quarter. Consumer discretionary trailed the industrials sector on that risk measure in the previous quarter.

The consumer discretionary sector also ranked among the top four sectors for probability of default, a third risk factor regularly analyzed by Market Intelligence, in addition to corporate guidance and short interest.

Risk levels influence portfolio company valuations and the timing of private equity exits. They may also signal an opportunity for private equity to acquire new businesses in the sector.

Signs of elevated risk in the consumer discretionary sector could draw the attention of private equity as it monitors key trends affecting portfolio companies. Two sectors that appear in this quarter's risk analysis, consumer discretionary and healthcare, also led all other sectors with the most private equity portfolio company bankruptcies since the start of 2022.

Corporate guidance

Cautious consumers pulling back on discretionary spending soured the outlook of executives at pet supplies business BARK Inc. and sporting goods retailer Big 5 Sporting Goods Corp., two of the six public companies in the consumer discretionary sector that lowered guidance in the first quarter. Shopping mall mainstay Abercrombie & Fitch Co. was the sector's outlier, raising its guidance after a stronger-than-expected holiday season.

On private equity firm TPG Inc.'s latest earnings call, CEO Jon Winkelried described "strong demand" for consumer sector businesses serving affluent consumers but "more of an issue from inflation and a pullback in demand" at the lower end.

– Download a spreadsheet of data from this story. – Read about the first-quarter decline in private equity entries. – Learn about the growing role of private credit in take-private transactions.

Six healthcare companies issued lower corporate guidance in the first quarter, but that number was offset by the 10 healthcare sector companies that raised guidance.

Short interest

Consumer discretionary had the highest average short interest, an indicator of bearish sentiment among investors. The second-highest was the healthcare sector.

Both sectors saw those averages tick up slightly in the first quarter while remaining below 12-month highs.

Probability of default

The healthcare sector had the highest probability of default, though it was slightly down from the previous quarter. Consumer discretionary remained among the top four sectors with the highest risk of probable default, according to S&P Global Market Intelligence Credit Analytics' credit risk model.