The U.S. consumer discretionary sector has been currently experiencing a mix of possibilities and perils. Over the last 30 days, the sector behemoth Consumer Discretionary Select Sector SPDR ETF (XLY Quick QuoteXLY - Free Report) has added 5.5%, while the past year has seen a more positive trend, with the fund gaining about 17%. This overall growth is reflected in the year-to-date figure, which stands at 29%.

Although higher unemployment, eroding consumer savings, and pressure on home prices are likely to weigh on consumer spending growth currently, a few favorable factors have lately shown light at the end of the tunnel.

Against this backdrop, below we highlight a few reasons that may boost consumer discretionary ETFs ahead.

Falling Inflation

The Consumer Price Index (CPI) showed prices rose 0% over last month and 3.2% over the prior year in October, a deceleration from September's 0.4% monthly increase and 3.7% annual gain in prices. Core inflation marked its slowest pace in over two years (read: 4 Sector ETFs to Win from 2-Year Slow October Inflation Data). 

Economists' expectations fell short of the actual data, as they had predicted a 0.1% month-over-month increase and a 3.3% year-over-year increase in prices. Core prices were also anticipated to rise by 0.3% over the prior month and 4.1% over the previous year.

A Less-Hawkish Fed

Cooling inflation triggered the possibility of a less-hawkish Fed, going forward. Following the release of this data, market indicators showed a nearly 95% probability that the Federal Reserve would keep interest rates unchanged in December, as reflected in data from the CME Group.

U.S. benchmark treasury yield slumped to 4.45% on Nov 16, 2023 from 4.63% recorded on Nov 13 while the two-year Treasury notes yielded 4.83% on Nov 16, 2023, down from 5.02% recorded on Nov 13.

Holiday Season Sales

The National Retail Federation (NRF) stated that consumers are estimated to shell out between $957.3 billion to $966.6 billion during November and December. Thus, spending will increase between 3% and 4% over the same period last year. The growth may be slightly lower compared to recent years, but it’s still in line with the growth rate from 2010 to 2019, when the average annual holiday outlays jumped 3.6%.

Oil Price Decline

U.S. crude prices recorded a drop of 5% on Thursday. This decline comes in the wake of increasing inventories and a downturn in industrial production. Falling energy prices bode well for retailers as consumers will spending less at gas stations. In fact, not only oil, overall inflation is falling, boosting consumers’ buying power. This, in turn, is likely to lead the Fed to stay put or cut rates. Falling rates, in turn, would again boost consumers’ ability to shell out on discretionary items.

Decent Earnings

The Consumer Discretionary sector is expected to record 26.3% earnings growth in the third quarter while earnings growth for the final quarter of 2023 is likely to be 18.1%. For the first and second quarters of 2024, the earnings growth is expected to be 14.1% and 14.7%, respectively, per Earnings Trends issued on Nov 15, 2023. The revenue growth for Q3 is expected to be 8.3%. For Q4 of 2023, Q1 of 2024 and Q2 of 2024, revenue growth will likely be 3.7%, 3.5% and 3.6%, respectively.

Top-Ranked ETFs in Focus

Against this backdrop, below we highlight a few top-ranked consumer discretionary ETFs that can played now.

Consumer Discretionary Select Sector SPDR ETF (XLY Quick QuoteXLY - Free Report) – Zacks Rank #1 (Strong Buy)

Vanguard Consumer Discretionary ETF (VCR Quick QuoteVCR - Free Report) – Zacks Rank #1

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD Quick QuotePSCD - Free Report) – Zacks Rank #2 (Buy)

Fidelity MSCI Consumer Discretionary Index ETF (FDIS Quick QuoteFDIS - Free Report) – Zacks Rank #2