Top 5 Consumer Discretionary Stocks: December 2024

After a turbulent start to the 2020s, the American economy is growing. Real gross domestic product rose 1.6% in the first quarter of 2024, according to the Bureau of Economic Analysis’ advance estimate, after rising 3.4% in the fourth quarter of 2023^[0]

With that in mind, some investors might be looking to buy stocks that benefit from higher disposable incomes. Consumer discretionary stocks are one place to look.

What are consumer discretionary stocks?

The Global Industry Classification Standard divides the stock market into 11 sectors, and two of them consist of companies that sell goods to people. The consumer staples sector contains companies that sell “needs,” like food and hygiene supplies. The consumer discretionary sector, on the other hand, contains companies that sell “wants.”

Consumer discretionary stocks are also called consumer cyclical stocks, as they’re sensitive to changes in disposable income caused by economic cycles of expansion and recession.

Best consumer discretionary stocks by 1-year returns

Below is a list of the five best-performing consumer discretionary stocks in the S&P 500 index, ordered by one-year returns.

Source: Finviz. Data is current as of Dec. 2, 2024, and is intended for informational purposes only, not for trading purposes.

Pros and cons of investing in consumer discretionary stocks

The returns on the consumer discretionary stocks shown above might look appealing, but it’s important to understand that the consumer discretionary sector — like any other sector — has unique upsides and downsides as an investment.

Pros of consumer discretionary stocks

• Strong performance when interest rates are low: Consumer discretionary companies make their money from consumer spending, and low interest rates are meant to stimulate that spending. Between December 2008 and December 2015 — a period when interest rates were near zero — one consumer discretionary exchange-traded fund, the Consumer Discretionary Select Sector SPDR Fund (XLY), rose more than 280% and outperformed the S&P 500 index.

• Familiar companies: The legendary investor Warren Buffett has often advised people to only invest in businesses that they understand. Unlike, say, the materials sector or the industrials sector, the consumer discretionary sector is made up of well-known brands with products that are at least somewhat familiar to most people.

Cons of consumer discretionary stocks

• Recession risk: As discussed, “consumer discretionary” roughly means “nonessential spending.” It’s among the first things people cut back on when times get tough.The Consumer Discretionary Select Sector SPDR Fund lost more than 30% of its value during the Great Recession, in line with the S&P 500 index.

• Interest rate risk: Low interest rates can boost some sectors, and that can include consumer discretionary stocks. But conversely, high interest rates can hurt them. The consumer discretionary sector has a higher debt-to-equity ratio than any other GICS sector, meaning it feels the most pain when borrowing costs go up.

What are the different types of consumer discretionary stocks?

Consumer discretionary stocks are a diverse bunch. Carmakers, clothing labels, restaurants and retailers all fit into one of its four industry groups.

Automobiles and components

The automobiles and components industry group is pretty self-explanatory. It contains car manufacturers such as Ford (F) and motorcycle manufacturers such as Harley-Davidson (HOG), as well as part suppliers such as Advance Auto Parts (AAP) and Goodyear (GT).

You might be wondering whether the automobile industry really belongs in the consumer discretionary sector, given that many Americans need a car to get to work.

The answer is yes, because the GICS doesn’t always make a ton of sense. It uses a very strict definition of “staples” — basically, “things you can’t live without.” As you’ll see in the next section, many common housewares are also considered consumer discretionary products.

Consumer durables and apparel

Consumer durables and apparel is a broad industry group consisting of almost every long-lasting or nonconsumable product you can buy.

The household durables industry includes furniture manufacturers such as La-Z-Boy (LZB), home builders such as Meritage Homes (MTH), appliance manufacturers such as Whirlpool (WHR) and houseware manufacturers such as Tupperware (TUP).

The leisure products industry is made up of companies that sell nonconsumable goods that are used for fun. Camping equipment companies such as Camping World (CWH) would fit into this category.

Then there’s the textiles, apparel and luxury goods industry, which includes jewelers like Brilliant Earth (BRLT) and clothing and footwear brands such as Nike (NKE) and Lululemon (LULU).

Consumer services

Another big-tent industry group is consumer services, which includes hospitality businesses and various subscription products.

The hotels, restaurants and leisure industry — as its name implies — includes casino operators such as Caesars Entertainment (CZR), hoteliers such as Marriott (MAR), gym operators like Planet Fitness (PLNT) and chain restaurants such as Chipotle Mexican Grill (CMG).

The diversified consumer services industry includes everything else that fits under the consumer services umbrella. An education services company like Bright Horizons Family Solutions (BFAM) would be an example.

Retailing

The retailing industry group might sound self-explanatory — but it’s a bit harder to define than you might think.

Amazon (AMZN) is generally seen as a tech stock, but it’s technically also a consumer discretionary stock, as it’s a member of the internet retailing industry.

The retail industry contains department stores such as Macy’s (M). And the specialty retail industry includes clothing stores such as Nordstrom (JWN), electronics retailers like Best Buy (BBY) and home improvement stores such as Home Depot (HD).

How to buy consumer discretionary stocks

If you don’t have a brokerage account, you’ll need to open one in order to invest in consumer discretionary stocks.

The next step is to choose between buying individual stocks or ETFs.

Individual consumer discretionary stocks

Individual stocks offer investors the chance to outperform market indexes like the S&P 500, but they come with some major risks and drawbacks.

Buying several individual stocks can be costly — both in terms of share prices, and in terms of the time you should spend researching those stocks. They can also be very volatile.

Because of that, one guideline some financial advisors recommend is to devote no more than 10% of your portfolio to individual stocks.

Consumer discretionary ETFs

You can also buy a wide variety of consumer discretionary stocks at the same time through an ETF. This is often cheaper — both in dollars and in research time — than buying individual stocks.

There are several index funds that track the entire consumer discretionary sector, and there are also several that track specific consumer discretionary subindustries, like retail or video games.

Researching an ETF is often easier than researching individual stocks, but it’s still worth doing, since ETFs are not without risk. Make sure you check out an ETF’s holdings and expense ratio — the percentage fee the fund charges each year — before investing.

» Looking to learn about exchange-traded funds? Check out some of the best ETFs in terms of performance