Americans remain uncertain about the economic future, particularly in light of ongoing trade tensions and potential tariff impacts, which have dampened consumer sentiment. Falling consumer sentiment may hurt household spending and thus spell trouble for the consumer discretionary sector, which attracts a major portion of consumer spending.
As such, consumer discretionary ETFs like Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Consumer Discretionary ETF VCR, Fidelity MSCI Consumer Discretionary Index ETF FDIS, First Trust Consumer Discretionary AlphaDEX Fund FXD and iShares U.S. Consumer Services ETF IYC are in focus. These funds have a Zacks ETF Rank #3 (Hold) or #4 (Sell).
The Michigan Consumer Sentiment Index in April dropped for the fourth consecutive month to 52.2 from 57.0 in March. This represents one of its lowest readings since the 1980s. The index has fallen 32.4% year over year, marking the biggest yearly decline since 2022.
The most concerning factor is income growth. Consumers are worried about weakening income growth amid the Trump administration's aggressive trade policies and fears of inflation resurgence. Without sustained income growth, consumer spending — often a key driver of economic momentum — is expected to remain subdued, which could have ripple effects across various investment sectors.
Trade Gyrations
President Donald Trump has softened his stance on tariffs, raising hopes of a resolution of the trade conflict. At a White House press conference last Tuesday, Trump called the current 145% reciprocal tariffs "too high" and said they would "come down substantially."
According to several reports, China might suspend its 125% tariff on some U.S. goods, which has boosted market sentiment. The potential tariff cuts would target key sectors, including medical equipment and industrial chemicals such as ethane, a crucial material for plastic production. China is also weighing the removal of tariffs on aircraft leasing payments, a major expense for domestic airlines (read: Tariff Relief Talks Lift Tech ETFs, Stocks: What's Ahead?).
In an interview with Time magazine on Friday, Trump said he expects many trade deals over the next three to four weeks.
Inflation Expectations Rising
The tariffs are expected to drive inflation higher and slow down the economy. The survey reveals that the year-ahead inflation expectations surged to 6.5%, the highest reading since 1981, in April from 5.0% in March. This reflects persistent inflation fears even after President Trump paused some tariff hikes on April 9.
Economy Slowing Down
U.S. economic growth is showing signs of deceleration with modest consumer spending and tariff-related import surges. Several forecasters are apprehensive that the U.S. economy will take a hit from Trump's trade policy. Per the latest Bloomberg survey, the economy is set to expand 1.4% in 2025 compared with the previous poll of 2%. The median respondent now sees a 45% chance of a downturn in the next 12 months, up from 30% in March (read: Buffer ETFs Attract Billions as Investors Seek Shelter from Market Turmoil).
The International Monetary Fund (IMF) cut its economic growth forecasts for the United States and other countries, citing uncertainty over trade policy and weaker demand. It slashed its U.S. economic growth forecast by 0.9 percentage point to 1.8% for 2025 and by 0.4 percentage point to 1.7% for 2026.
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Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports Fidelity MSCI Consumer Discretionary Index ETF (FDIS): ETF Research Reports First Trust Consumer Discretionary AlphaDEX ETF (FXD): ETF Research Reports iShares U.S. Consumer Discretionary ETF (IYC): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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