Why Consumer Cyclical Stocks Are Suddenly Lagging

Key Takeaways

• Consumer cyclical stocks have lagged behind the broader market and their defensive counterparts in 2025.
• These stocks are pressured by a dimmer economic outlook and a pullback in consumer discretionary spending.
• Consumer sentiment has soured recently amid rising concerns about inflation.
• Morningstar analysts still see bargains in the category.

Amid persistent worries about inflation, tariffs, and the health of the American economy, consumers are bracing for tougher times. A Tuesday report from the Conference Board showed consumer confidence falling the most since August 2021—a sign of pessimism that rattled investors and sent stocks falling.

The data was just the latest complication for a stock market struggling to adjust to a changing outlook. Since the beginning of the year, consumer cyclical stocks have lagged the broader market by a widening margin. That’s a major change from 2024; these stocks ended that year slightly higher than the market.

Consumer cyclical companies benefit from discretionary spending on nonessential items—retail, automobiles, restaurants, entertainment, travel, and so on. Such firms tend to be closely tied to the performance of the economy. Meanwhile, consumer defensive companies sell essentials, like groceries and household goods. Demand for such products tends to remain steady regardless of the economic environment.

Both categories are facing pressure thanks to inflation and tariffs, but cyclical stocks have fallen out of sync with the broader market and their discretionary counterparts. The Morningstar US Consumer Cyclical Index is down 2.77% since the beginning of January, compared with a 2.31% gain for the Morningstar US Market Index over the same period. Over the past month, consumer stocks have plunged 6.2% while the broader market is down just 2.0%. Last week alone saw the sector lose 4%.

Electric car maker Tesla TSLA—the most heavily weighted stock in the Consumer Cyclical Index—is down more than 16% this year and responsible for a portion of that drag. It’s not the only firm in the red; Chipotle CMG is down more than 14% this year, General Motors GM has fallen 13%, and Ulta Beauty ULTA is down nearly 17%.

Meanwhile, consumer defensive firms have outperformed. “We’re seeing more pressure on the discretionary side,” says Morningstar equity analyst Noah Rohr. “Consumers are being more cautious with their spending, prioritizing … essential categories like food and beverage and household essentials.” Stubborn inflation is crimping consumer spending and changing behaviors even for must-spend items. That’s feeding through to the stock market.

Why Are Consumer Cyclicals Struggling?

Recent economic data points to cracks in the consumer landscape. One closely watched measure of consumer confidence plunged in February, with consumers’ outlook for the economy falling to its lowest level since November 2023. Retail sales data for January showed a 0.9% drop compared with December, a much larger change than economists expected. Meanwhile, inflation remains sticky. Prices rose 0.5% in January, according to the latest Consumer Price Index report, again more than economists anticipated.

Markets are sensitive to any hiccups in the outlook, and the outlook is changing. From a big-picture perspective, consumer cyclical stocks face a perfect storm of macroeconomic headwinds, according to Morningstar Investment Management chief multi-asset strategist Dominic Pappalardo. “Tariffs hurt them because their import costs go up,” he explains. “An economic slowdown hurts them because consumers spend less money. And inflation hurts them because it makes their products less affordable to their customers.”

Another piece of the puzzle is elevated interest rates, according to Jaime Katz, senior equity analyst at Morningstar. With borrowing costs well above their pre-pandemic lows, some consumers have been delaying big-ticket purchases that require financing, like new homes. That pressure manifests in corporate bottom lines. If consumers aren’t buying homes, they aren’t undertaking major renovation projects or purchasing new appliances.

Macro Pressures Weigh on Discretionary Spending

As the economic backdrop has changed, consumers are prioritizing essentials and keeping a close eye on costs. With food prices significantly higher than they were just a few years ago, even as the pace of inflation has slowed, Rohr says he has seen grocers like Kroger KR and Albertson’s ACI underperform larger retailers like Walmart WMT and Costco COST. “Some of that could be driven by consumers being more price conscious and searching for deals at the lower cost competitors,” he says. Grocery stores fall under the consumer defensive umbrella.

On the cyclical side of the equation, Katz says she’s seeing investor concern over tariffs and taxes bleed through into stock performance. Many automakers manufacture in Mexico, for instance, while much of global toy production is concentrated in China. “It’s a lot harder to justify ownership in some of these names when you’re not sure if some of the economics are going to be competed away by tariffs,” she explains. “A lot of that caution has probably affected the share performance.”

Investor Jitters

Even if backward-looking data shows consumer spending has held up relatively well until now, markets are sensitive to any hiccups in the outlook.

Walmart’s operating results are often viewed as a bellwether for the health of the American consumer. When the firm offered weaker-than-expected guidance last week (even after reporting strong fourth-quarter results), its shares plunged more than 6%. Rohr says the company’s fundamentals are still sound, and he expects it to grow profits in the coming months. “I don’t think there’s any indication that their business is at fault,” he says. “It’s more so that the stock has had a really good run and pulled back a bit on weaker guidance.”

This isn’t an isolated phenomenon. That same day, a comment by a Trump administration official that cruise companies may be required to pay more US taxes sent stocks in that industry plummeting. Shares of Carnival CCL lost 5.8% on the day.

Bargains Remain

Even with macroeconomic headwinds mounting, analysts say there are still bargains under the consumer cyclical umbrella. Katz points to the power sports sector, which includes Polaris PII, Malibu Boats MBUU, and BRP DOOO. She also thinks toy names like Hasbro HAS and Mattel MAT look undervalued, along with furniture retailer Wayfair W.

For more, you can also check out this list of the best cyclical stocks to buy.