It’s still early in 2026, but one trend is starting to take shape. Investors are finally starting to look beyond the technology sector for growth. They’re rotating into more cyclical sectors like consumer discretionaries, materials and financials. I covered this yesterday in What My System Says Today.
After a transitional year impacted by tariffs and policy change, Wall Street is betting big that the economy accelerates in 2026.
You know me… and you know I take long-term macroeconomic forecasts like that with a grain of salt. There are just too many variables that can change too quickly for those to be of much use to us.
Rather than forecast, I build trading systems. I objectively follow the data and invest accordingly.
So, the questions is… could there be solid investment opportunities in the sectors that Wall Street is rotating into – for our reasons, not theirs?
Let’s find out. We’ll do a sector X-ray on the consumer discretionary sector to start.
One thing is clear. While Wall Street may be excited about the strength of the consumer, my Green Zone Power Ratings system is recommending caution – at least in the large-cap space. Of the 24 S&P 500 stocks in the sector, 10 rate as “Bearish” and another nine rate is “Neutral.” Only five rate as “Bullish,” meaning they have a rating of 60 or higher.
We’ll focus our attention on the “Bullish” rated stocks, of course. Our goal here is to find the best of the best that are poised to outperform.
Where Do Consumer Discretionaries Pick Up Points?
My Green Zone Power Ratings system is a composite of six individual factors – growth, value, quality, momentum, volatility and size – each of which has several component subfactors. Let’s see where consumer discretionaries score well, picking up points.
Companies in the consumer discretionary space tend to depend heavily on branding. Their brand reputation and cachet allow them to charge a premium over their peers, which boosts profit margins.
Furthermore, given how sensitive shoppers can be to the health of the economy, many companies in this space tend to be financially conservative, keeping their debt load modest.
So, it’s normal for consumer discretionary stocks to rate well on my quality factor. But today, I wouldn’t say that they rate “well.” I’d say that they rate extraordinarily, incredibly well. 22 out of the 24 stocks in the sector rate as “Bullish” on their quality factor. I’m struggling to remember a time when I saw a sector that heavily weighted towards one factor.
Moving beyond quality, exactly half of the consumer discretionary stocks rate as “Bullish” on growth, and another eight rate as “Bullish” on value. Seven rate as “Bullish” on momentum and volatility.
It’s rare to find a “perfect” stock. There are almost always trade-offs among the factor ratings. For example, stocks that rate exceptionally well on quality tend to trade at a premium. It’s not super common to see stocks that rate really well on both quality and value. We’ll keep that in mind as we dig into the highest-rated stocks.
The Best of the Best
I mentioned earlier that only five consumer discretionary stocks rated as “Bullish” on my Green Zone Power Ratings system. Let’s take a look at these best of the best to see if any are good candidates for further research.
Of the five, two are homebuilder stocks: PulteGroup (PHM) and NVR, Inc. (NVR). Two are fashion brands: Ralph Lauren Corp (RL) and Tapestry (TPR), the owner of the Coach, Kate Spade and other brands. And one is iconic American automakers Ford Motor Company (F).
Ford doesn’t rate particularly well on quality (automakers rarely do), but it rates strongly on each of the other factors. There is risk in the sector if the economy ends up not growing as strongly as Wall Street hopes, as auto sales are highly cyclical. But lower interest rates could be a boon to sales, and the shares have been trending higher since April.
The same holds true for the homebuilders. New home sales are very sensitive to the health of the economy, and interest rates a major determinant of affordability. If long-term rates ease in 2026, homebuilders will likely enjoy a bump.
Fashion brands are harder to predict. They are sensitive to the health of the economy, of course, as people are less likely to restock their closet when money is tight or job security is nonexistent. But there is also a “cool factor” that doesn’t necessarily show up in the numbers. It’s hard to know ahead of time when a brand is going to have a strong season.
That said, both Ralph Lauren and Tapestry rate well on their momentum factors, so Wall Street appears to be anticipating strong growth ahead.
To good profits,
Adam O’Dell
Editor, What My System Says Today
