Consumer Discretionary Select Sector SPDR ETF New York Stock Exchange: XLY posted a significant growth spurt this quarter as the year draws to a close. The ETF is up 26% in the quarter, bringing its year-to-date performance to 30% as of the end of last week. To put this into context, such results have even led to the growth and attractiveness of tech giants, thanks to the Invesco QQQ ETF. NASDAQ: QQQThe popular technology-focused ETF is up nearly 16% in the quarter and 28% year to date.
Potential risk occurs when the XLY ETF makes new highs, significantly outperforming the overall market. This raises the question: is the sector now overbought and ready for a pullback or correction? One key indicator for assessing such conditions is the relative strength index (RSI). At its current level of 80.23, the XLY ETF is firmly in overbought territory, signaling increased susceptibility to a near-term pullback. However, it is equally important to examine how the sector’s leading players operate and analyze specific data influencing consumer confidence and spending, as these factors can provide greater insight into the sector’s resilience or potential vulnerabilities.
A combination of factors contributed to the sector’s growth this quarter
Consumer discretionary stocks have risen impressively over the past quarter, driven by robust consumer spending and rising economic optimism, including optimism about deregulation from President-elect Donald Trump.
Robust job growth and a robust labor market continue to drive consumer discretionary spending. Nonfarm payrolls rose by 227,000 in November, well above expectations and rebounding sharply from October’s 36,000 that were hit by the hurricane. Wage growth increased 0.4% for the month and 4% for the year, slightly exceeding forecasts and keeping consumers’ wallets strong.
Despite the unemployment rate rising to 4.2%, signaling a potential improvement in labor market conditions, a strong November jobs report fueled optimism about the economy. Signs of a soft landing, along with expectations of another Federal Reserve rate cut this month, have eased recession fears and supported consumer confidence. Meanwhile, strong earnings reports from luxury goods, travel and e-commerce companies point to robust demand, especially from higher-income households and international markets.
Adding to this momentum are forecasts for a strong holiday shopping season, supporting investor sentiment and driving rotation in growth-oriented sectors such as consumer discretionary, making it a standout performer in the final quarter of the year.
Two of the Industry’s Leading Companies Show No Signs of Slowing Down
The XLY ETF’s two largest holdings, Amazon.com and Tesla, collectively account for nearly 40% of the fund’s weight, making their performance critical to the ETF’s overall direction and performance. Given their outsized influence, these stocks are a key factor for investors deciding whether to take profits or stay invested.
Amazon.com today
(As of 6:15 p.m. ET)
- 52 week range
- $143.64
▼
$230.08
- P/E ratio
- 48.41
- Target price
- $236.98
Amazon.com NASDAQ:AMZNETF’s largest holding, with a 22.22% stake, has posted one of the strongest performances in the consumer discretionary sector this year. AMZN recently hit new 52-week highs, extending year-to-date gains to nearly 50%. Analysts remain optimistic, forecasting an additional 4% upside potential for the stock. The breakout to new heights highlights Amazon’s continued momentum, which bodes well for the stock and the sector as a whole.
Tesla today
(As of 6:08 p.m. ET)
- 52 week range
- $138.80
▼
$404.80
- P/E ratio
- 106.79
- Target price
- $248.12
Tesla NASDAQ:TSLAthe second-largest holding with a 17.05% stake saw remarkable growth, becoming one of the best-performing stocks in the ETF. After a sluggish start to the year, TSLA rebounded sharply with a strong third-quarter report, improved sentiment and innovation around its business model. The stock is now up 56% year to date, 35% for the month and nearly 80% for the quarter. Tesla is approaching its all-time high near $414, and with strong upward momentum, it remains a strong tailwind for the sector.
However, the strong concentration of ETFs in these two companies poses risks. If AMZN or TSLA experiences a pullback, the ETF could be vulnerable to downside pressure. While current data and price action suggest further upside potential, investors should remain cautious, mainly because XLY is trading at overbought levels based on RSI. A reversal in the trend of any stock can serve as a basis for taking profits and reducing the impact on the sector.
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