Consumer discretionary stocks lag as 2 sectors dominate 2026 rotation

Consumer discretionary stocks are trailing the broader market in 2026 as consumers shift spending patterns and capital rotates toward energy and AI-linked sectors.

"AI themes have moved back to the top of the rankings, supported by strong earnings revisions and favorable macro regime signals," a team of strategists led by Gerry Fowler at UBS said in a note. The firm flagged consumer discretionary and consumer staples as the weakest themes, citing macroeconomic worries and insufficiently positive earnings revisions.

Among the laggards, J&J Snack Foods Corp. (JJSF) — owner of Superpretzel, Icee and Dippin' Dots — has seen annual earnings estimates fall more than 3% in the past 30 days, with FY26 EPS now expected to decline 6% to $4.35 per share, according to Zacks Investment Research. The company's Q2 revenue of $344.82 million missed Wall Street estimates and fell 3% from a year earlier. Wyndham Hotels & Resorts Inc. (WH), another discretionary name, reports earnings this week with analysts expecting revenue growth of just 1.5% year on year, down from 8.2% in the same quarter last year.

The divergence matters for portfolio positioning. UBS sees AI-linked stocks benefiting from upward revisions to hyperscaler capital expenditure, with the broader supply chain — chips, memory, power and infrastructure — likely to see positive earnings momentum through year-end. Healthcare is also emerging as a beneficiary, with the revision cycle starting to turn after spending much of 2025 as one of the biggest sources of earnings downgrades, the strategists said.

The rotation out of consumer discretionary names comes as the Iran conflict props up energy prices and a memory chip shortage sustains the AI trade. The S&P 500's energy sector has gained alongside crude, which traded at $80.24 a barrel, up 7.3% over five sessions. The 10-year U.S. Treasury yield stood at 4.61%, up 3.3 basis points in the same period, while gold eased 1.2% to $4,036 an ounce.

UBS's "theme-o-meter," which ranks market themes using a quantitative formula evaluating macroeconomic regimes, earnings, valuation and sentiment, shows AI themes back near the top after a summer pullback. "The recent weakness in many AI-linked stocks appears inconsistent with the underlying fundamentals picture," Fowler's team said, attributing the underperformance to "summer deleveraging, profit-taking and positioning adjustments rather than a material deterioration in the outlook."

The consumer discretionary weakness is broad-based. J&J Snack Foods now carries a Zacks Rank #5 (Strong Sell), reflecting the unfavorable trend in estimate revisions. The company faces headwinds from higher labor costs, distribution expenses and manufacturing inefficiencies during its operational restructuring. Annual sales are expected to dip 4% in FY26 to $1.52 billion.

Wyndham, which reports after the close Wednesday, has seen its stock fall 6.6% over the past month, underperforming the broader consumer discretionary travel segment, where shares have gained 2.2% on average. The company has missed Wall Street's revenue estimates multiple times over the last two years.

Where Capital Is Flowing Instead

UBS identified several names at the top of its quantitative-plus-fundamental screen, including Iberdrola SA, Infineon Technologies AG, SSE Plc, Talen Energy Corp., Alphabet Inc., Prysmian SpA, VAT Group AG, Broadcom Inc. and Halma Plc — spanning AI infrastructure, electrification and industrial technology. The European AI enablement and electrification themes are "screening among the strongest opportunities," the strategists said, in some cases as attractive as equivalent U.S. themes.

Healthcare is also drawing renewed interest. UBS moved overweight on the sector before the inflection became visible in consensus estimates, arguing the downgrade cycle was close to exhaustion. Beyond obesity drugs — where Eli Lilly & Co. and Novo Nordisk A/S are seen as the biggest beneficiaries — large-cap pharmaceuticals continue to generate resilient earnings growth, while biotech is benefiting from resurgent M&A activity.

This article is for informational purposes only and does not constitute investment advice.