Consumer Cyclicals: Brands That Stay True to Their Niche Can Thrive In an Uncertain Environment

The Morningstar US Consumer Cyclical Index rose during the second quarter but trailed the broader market’s gain. Across our sector coverage universe, the median stock trades at a 16% discount to our intrinsic valuation, with about 54% of firms earning a 4- or 5-star rating. We surmise that apparel and travel subsectors, which trade at 38% and 16% below their respective fair value estimates, look particularly attractive. Even in the face of unrelenting economic and geopolitical uncertainty, we expect competitively advantaged companies to incite spending across income cohorts by investing in consumer-valued product innovation.

Discretionary spending has been under pressure amid inflation and the war in Iran. However, rather than capping spending broadly, this economic uncertainty is affecting income cohorts unevenly, a dynamic clearly evident in air travel. According to IATA data, North American air carriers’ premium revenue passenger kilometers for international trips rose 5.5%, on average, in March and April, versus 1.2% growth in economy.

This divergence highlights continued strength among higher-income consumers, supported by elevated equity levels. While premium providers benefit from resilient demand, value-oriented players must compete by delivering higher perceived value per dollar. Lower-income consumers are increasingly factoring in total trip costs, often choosing cheaper options (that is, driving rather than flying) to maintain their travel experiences. As such, targeted positioning is critical. Firms must align their products and services with what consumers value. For example, travel firms can leverage loyalty programs to attract and retain consumers by enabling points to be accumulated across partner brands, thereby enhancing stickiness.

While apparel is typically seen as a discretionary expenditure, we think growth has accelerated as consumers refresh their wardrobes, potentially due to relatively low unemployment (4.3%). In January 2026, apparel and footwear consumption rose nearly 7% year over year, outpacing inflation (2.6%), though some of this strength could be a byproduct of lapping a softer January 2025. Regardless, we believe curating compelling assortments aligned with their core consumers’ preferences will position apparel firms for growth.

Top Consumer Cyclical Sector Picks

Gildan GIL

• Fair Value Estimate: $95.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Narrow-moat Gildan trades at a 45% discount to our $95 fair value estimate. We believe the market undervalues the benefits of the Hanesbrands acquisition, which has roughly doubled Gildan’s annual sales base and improved its struggling consumer operations, while strengthening the firm’s position in printwear basics. We expect pairing low-cost manufacturing with the acquired retail brands to drive share gains. As Gildan improves production efficiency, it projects about $250 million in annual run-rate cost savings by 2028. Gildan closed 2025 with $4.4 billion in net debt, which we expect to be reduced rapidly.

Lululemon LULU

• Fair Value Estimate: $280.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Trading 60% below our $280 fair value estimate, narrow-moat Lululemon looks attractive. The firm has struggled with rising competition and merchandising issues, but we think its brand, the source of our narrow moat rating, remains popular. Moreover, it has grown its addressable market through store openings in China and elsewhere and expansions into footwear and men’s activewear. Meanwhile, some of the recent turmoil has subsided with the amicable resolution of its proxy fight with founder Chip Wilson and the hiring of former Nike executive Heidi O’Neill as CEO.

Nike NKE

• Fair Value Estimate: $94.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Wide-moat Nike trades at a discount to our fair value estimate. Fiscal years 2025 and 2026 have been among Nike’s most challenging periods in decades, as it has lost share to rivals. But we believe CEO Elliott Hill is making the right moves to bolster Nike’s brand value, which underpins our wide economic moat rating. Hill’s overall strategy is to invest in the firm’s connections to global sports, which we view as Nike’s greatest advantage. In the long run, we think Nike can return to mid-teens EBIT margins as it increases full-price selling, releases new merchandise, and raises sales in high-margin markets.