After lagging behind other sectors in recent quarters, consumer discretionary stocks may finally be on the verge of a comeback. With inflation easing and the job market staying strong, investors are starting to warm up to companies that depend on consumer spending.
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According to David Russell, Global Head of Market Strategy at online brokerage TradeStation, “Consumer discretionary stocks have endured perhaps the worst news from tariffs, and now the pendulum might swing the other way in the back half of 2025.”
Several Wall Street analysts have recently increased their stock price targets for e-commerce giant Amazon (AMZN), one of the prominent players in the discretionary space, citing a resilient consumer backdrop and strength in the cloud computing business. For instance, Cantor Fitzgerald analyst Deepak Mathivanan raised his price target for AMZN to $260 from $240 and reiterated a Buy rating, stating that a 7% year-over-year growth in Q2 U.S. non-store retail sales indicates favorable trends for growth in Amazon’s North America retail business.
This optimism comes despite recent underperformance. The sector’s key ETF, Consumer Discretionary Select Sector SPDR Fund (XLY), has been one of the weakest performers so far this year. Among all the SPDR sector ETFs, it ranks second-to-last, outperforming only the Health Care Select Sector SPDR Fund (XLV).
For context, XLY is an exchange-traded fund (ETF) that tracks major consumer-focused companies, including giants like Amazon and Tesla (TSLA).
Big Hopes on Tesla
Tesla was one of the first big names to report results as Q2 earnings season kicks off. Backward-looking numbers lagged estimates but investor excitement is building around potential robotaxi updates, with recent developments fueling long-term growth hopes. In fact, Daniel Ives, a Wedbush analyst and TSLA bull, stated that he is at “positive crossroads” in the Tesla story, given that CEO Elon Musk is “laser focused as CEO”, the robotaxi/autonomous expansion has started, and demand stabilization, especially in China, has begun.
Meanwhile, Russell said, “Tesla is evolving from a pure-play EV stock into a robotaxi story. Investors may now give Musk the benefit of the doubt, focusing on long-term growth and worrying less about slowing unit growth. That creates the potential for upside surprises.”
Technically, Tesla’s chart recently flashed a bullish signal known as a “golden cross,” with the 50-day moving average climbing above the 200-day. This pattern is often seen as a sign of long-term upside.
Retailers Gear Up for a Brighter Second Half
Russell said investors may see opportunity in retail stocks because much of the bad news could be priced in. This could be relevant in the second half of the year with the back-to-school season underway and the holiday shopping season ahead.
Recent data supports this view —U.S. retail sales rose 0.6% in June 2025, beating the expected 0.1% increase. Also, consumer confidence improved. The University of Michigan’s early July reading was 61.8, the highest in five months and up from 60.7 in June. Furthermore, jobless claims dropped for the fourth week in a row, ending July 5.
Russell noted that with rising consumer sentiment, a strong job market, lower oil prices, and possible rate cuts ahead, the retail sector may offer more upside than downside for investors.
At the same time, the strong scene gives a good boost for retail giant Amazon. All eyes are on its next Q2 report, due July 31, for signs of more growth in e-commerce sales.
Furthermore, this momentum could benefit leisure stocks, which typically perform well in a stable economy. When job security is strong, people feel more confident spending on travel and vacations. Russell highlighted leisure names like Carnival (CCL), Marriott (MAR), and Hilton (HLT) as potential winners in this environment.
Other Stocks to Watch For
According to Russell, another group of stocks in the discretionary sector to keep an eye on includes homebuilders and automakers. Homebuilder ETFs like iShares U.S. Home Construction (ITB) are holding around their summer 2023 highs, suggesting resilience despite industry challenges. Russell believes that much of the bad news already appears to be priced in, and a potential Fed rate cut in September could provide further support.
It is worth noting that the ITB ETF rallied about 8% on July 22 and ended the day at a 5-month high, as two of its top holdings, D.R. Horton (DHI) and PulteGroup (PHM), surged after reporting better-than-anticipated second-quarter results. Interestingly, John Burns, CEO of John Burns Research and Consulting, told MarketWatch that despite a notable slowdown in the new home market, many of the dominant U.S. builders continue to “surprise Wall Street to the upside with how well they are running their businesses in this environment.”
Meanwhile, he added that stocks like Ford (F) and GM (GM) could benefit from lower interest rates, which often boost auto demand.