Another Record High, But Consumer Strength is Lacking

2026 has been odd in that new all-time highs in the S&P 500 ($SPX) have been accompanied by a lackluster Consumer Discretionary (XLY) sector. Most of the current secular bull market has been fully supported by a strong consumer, but we're seeing more cracks in the consumer foundation, as you can glean from this chart.

During Period 1 and through the end of 2021, the S&P 500 trended higher, and XLY moved up on an absolute and relative basis. That looks like a healthy consumer supporting the stock market. Then there was Period 2, the 2022 cyclical bear market that featured the highest inflation levels over the past three to four decades. Obviously, consumer stocks were hit, which was to be expected.

That takes us to Period 3, where things began to get interesting for the consumer discretionary stocks. The rally higher from the depths of the 2022 cyclical bear market is obvious, and consumer discretionary stocks moved up as well. But note that the relative strength of consumer discretionary was wildly volatile, although the relative strength ended this period at a new high.

Period 4 saw another rally in the S&P 500. Consumer discretionary stocks were hit hard in Q1, but rallied back to set new absolute highs later in the year. However, relative strength began to fall off. In other words, the XLY's decade-plus of relative strength ended.

Period 5 has seen a new level of bad, in terms of consumer discretionary performance. Relative strength has been horrific but, this time, XLY has also moved lower on an absolute basis.

Areas like restaurants & bars ($DJUSRU), consumer services ($DJUSCS), clothing & accessories ($DJUSCF), recreational services ($DJUSRQ), specialty retail ($DJUSRS), travel & tourism ($DJUSTT), gambling ($DJUSCA), home construction ($DJUSHB), furnishings ($DJUSFH), automobiles ($DJUSAU), recreational products ($DJUSRP), and tires ($DWCTIR) have performed miserably, pointing to an extremely weary consumer. The S&P 500 is up 14% year-to-date, but the XLY is down 5% over the same period. That's 19 percentage points of underperformance vs. the benchmark. Here's a visual of the culprits.

Does that look like a consumer bull market to you? Yeah, me neither. Higher interest rates, food prices, and crude oil prices are all contributing to the consumer's weak state.

The good news, thus far, is that all the money rotating away from discretionary stocks has found a new home in other areas, particularly Energy (XLE) and Technology (XLK). At some point, money will need to rotate back to discretionary stocks, and it will. But the stock market will need to sense an end to (1) the US-Iran war and (2) higher inflation, plus an improving economy. Right now, that seems like a tall order. Personally, I'll wait to see strength return to some of these discretionary areas before I get overly excited. The charts will tell us when momentum and relative strength are improving. Until then, I think we sit back, be patient, and let the charts tell us when it's time to jump back in.

It's Earnings Season Again!

I'm ready to turn my attention to earnings once again. Several big companies are set to report excellent results. In my opinion, here are two that look like they're ready to beat Wall Street consensus estimates handily.

JP Morgan (JPM)

I love the improving relative strength throughout Q3. I believe that's going to result in a very strong earnings report.

The Travelers Cos. (TRV)

TRV is printing a bullish wedge pattern, which typically resolves in the direction of the prior trend, which clearly is higher. TRV has also been a relative leader in insurance throughout the past year, and especially during Q3. I'm looking for an excellent report here as well.

Don't Ignore This Signal

While relative strength can be an excellent signal heading into an earnings report, relative weakness can be a big problem. One company will be reporting next week that shows awful relative strength. I believe it's setting up for a very disappointing earnings report. That will be the chart I feature in our FREE EB Digest newsletter on Monday morning. If you'd like to check it out, and you're not already a FREE subscriber, simply CLICK HERE and enter your name and email address. There is no credit card required.

Happy trading!
Tom