Under-the-radar stock action flashes a bullish sign for 2025

• Consumer discretionary stocks are outperforming consumer staples in a sign of risk in the broader market.

• Gains in the consumer discretionary sector reflect a strong economy and high consumer confidence.

• The S&P 500 is strongly correlated with consumer estimates during a bull market advance.

The stock market is flashing an under-the-radar bullish signal indicating that the ongoing rally is set to extend into 2025.

The signal is simple but powerful: the outperformance of risky stocks over defensive stocks has hit record highs.

Specifically, consumer discretionary stocks have reached new highs when measured against consumer staples stocks.

Consumer discretionary stocks are considered risky because they reflect non-essential spending, while consumer staples stocks meet the needs of consumers.

The thinking goes that consumers will continue to buy products from companies operating in the consumer staples sector even when the economy slows or contracts. At the same time, they curb their spending on discretionary items in times of economic distress.

“Defensive stocks tend to lead when there’s trouble, and we’re not seeing that,” Ryan Detrick, chief market strategist at Carson Group, told Business Insider. “That’s a good thing.”

Some of the top companies in the consumer discretionary sector include: Amazon, Tesla, Home Depotand McDonald’s. The largest companies in the consumer goods sector are: Costco, Walmartand Procter & GambleWhich sells toilet paper, soap and diapers.

The widening performance gap indicates that investors feel comfortable betting that consumers will continue to spend their income on goods they do not necessarily need but want, given that The economy remains on solid footing.

The performance gap between the two sectors is striking.

Year-to-date, the consumer discretionary sector is up nearly 3% compared to a 2% decline in the consumer staples sector.

Over the past year, consumer staples rose just 7% compared to a 34% increase in consumer discretionary goods. The outperformance continues looking back three and five years as well. At the same time, Standard & Poor’s 500 It is up 2% year to date and 27% over the past year.

From a fundamental perspective, Arun Sundaram, senior equity analyst at CFRA Research, told Business Insider, the strong labor market has boosted consumer discretionary stocks. At the same time, Concerns about GLP-1 weight loss drugs This exacerbated the decline in consumer goods inventories.

“Investors are wondering what the long-term impact of revolutionary weight loss drugs like Ozempic will be on food and beverage companies, which dominate the FMCG sector,” Sundaram said.

The story continues

But setting aside what is fundamentally driving the widening divergence in performance between the two sectors, this is typical investor behavior in a bull market, according to Sam Stovall, chief investment strategist at CFRA.

“It makes sense, intuitively, that when the consumer discretionary sector rises, the S&P 500 also rises, since the consumer discretionary sector has a 93% correlation of monthly returns with the S&P 500,” Stovall told Business Insider.

By comparison, the consumer staples sector has a 73% correlation to the S&P 500, according to Stovall.

This is the type of behavior investors want to see during bull markets, because it confirms the underlying trend that is pushing stocks higher.

“When looking at sector returns during ups and downs in the market, consumer discretionaries outperform during ups and consumer staples underperform,” Stovall said.

To account for the skewed weighting of Amazon and Tesla in the consumer discretionary sector, which together make up about 40% of the sector, Michael Batnick, director of research at Ritholtz Wealth Management, looked at the relative performance of the consumer discretionary and equally weighted consumer staples sectors.

He likes what he sees.

“I’m not worried about This is absolutely soldAnd this is the chart that gives me confidence,” Batnick said in A Podcast This week for the complex.

Patnick called it “the most bullish chart in the world,” adding that “this is not something you see in a bear market.”

Ryan Detrick, chief market strategist at Carson Group, told Business Insider that the risk signal isn’t limited to the relative performance of consumer discretionary.

JC Parets, technical analyst and founder of All Star Charts, echoed the same sentiments when speaking with him The complex and friends Thursday.

Parets presented a long-term chart of the relative performance between the two sectors, explaining that the ratio chart had just broken through the key resistance level that marked the stock market peaks in 2007 and 2021.

This is ultimately a risk signal indicating that the stock market rally will continue.

“We’re not too worried that things are falling apart and the end is near as we always hear, as the right leadership is still in place,” said Detrick of the Carson Group.

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