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Improving U.S. growth could support cyclical sectors despite elevated inflation and rates.
XLY offers consumer discretionary exposure, while XLK and DRAM target technology and AI.
Rising energy prices and further Fed hikes remain key risks for cyclical ETFs.
Markets have been wavering lately as participants closely monitor every piece of Fed-related news. Signs of a U.S. economic recovery are emerging, but the rebound remains uneven. Global market volatility has also increased, mainly because the Iran war-led energy crisis has fueled inflation and pushed interest rates higher worldwide.
Against this backdrop, the Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, marking its first rate hike in three years. The unanimous decision lifted the target range to 3.75–4% from 3.5–3.75%, as policymakers sought to contain persistent inflation amid rising oil prices and renewed tensions in the Middle East.
Fed Sees Firmer Economic Growth
Despite inflation concerns, the Fed upgraded its economic growth forecast. GDP is now projected to expand 2.3% in 2026, compared with 2.2% in its previous forecast.
Officials also lowered their unemployment forecast to 4.1% from 4.3%, matching the current unemployment rate. Policymakers noted that domestic spending has remained resilient, although geopolitical uncertainty continues to cloud the outlook.
Cyclicality of Sectors
The U.S. economy continues to show resilience, supported by relatively healthy labor-market data, strong consumer spending and a recovery—although not a brisk one—in several cyclical sectors, including retail. Historically, cyclical sectors tend to outperform defensive sectors when economic conditions improve and interest rates begin to normalize.
These sectors often struggle when the economy contracts but can become major beneficiaries when economic conditions turn more favorable. According to Fidelity, consumer discretionary and financials, along with economically sensitive sectors such as industrials and information technology, tend to perform well during the early stages of an economic recovery.
Fidelity defines the early-cycle phase as a period when economic activity begins to revive, credit starts to grow, monetary policy remains accommodative, and sales and profits improve. Several of these conditions are emerging in the U.S. economy, suggesting that cyclical sectors could attract investor interest in the coming months. However, the Iran war-driven increase in energy prices remains a key risk.
The Fed has already raised rates by 25 basis points this week and may deliver another hike later this year. If so, the increase is likely to be limited to 25 basis points, although the possibility of a larger move cannot be ruled out.
Against this backdrop, several cyclical sectors and related ETFs could benefit from the expected earnings-growth trend. For investors seeking exposure to these areas, we highlight three ETFs with significant exposure to cyclical industries.
ETFs in Focus
State Street Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report)
U.S. retail sales surged 1.2% in August, marking the largest increase since March, following a revised 0.5% decline in July. Sales rose 6.0% year over year in August. The increase was partly driven by higher gasoline prices, which lifted receipts at service stations by 3.1%. Consumers have continued to spend despite sticky inflation, while back-to-school purchases may have provided an additional boost.
The broad increase in sales was led by a 2.6% rise in receipts at non-store retailers. With Amazon accounting for roughly one-fourth of XLY’s portfolio, the ETF could benefit from continued strength in e-commerce. However, increasingly value-conscious consumers could signal weakening conditions for the consumer discretionary and retail sectors if inflation remains elevated.
State Street Technology Select Sector SPDR ETF (XLK - Free Report)
Although technology is a cyclical sector, XLK has significant exposure to artificial intelligence (AI). The technology sector generally underperforms in a higher-rate environment, but some technology giants can act as relative safe havens during periods of market turbulence.
The AI trade continues to benefit from strong structural tailwinds, with hyperscalers expected to significantly increase capital spending. Higher interest rates may create short-term volatility, but they are unlikely to eliminate the long-term demand for AI infrastructure and related technologies.
DRAM offers another way to participate in the AI theme. Memory stocks rallied on Sept. 17, 2026, after Intel CEO Lip-Bu Tan said memory demand would remain strong and supply constraints could worsen in 2027, potentially pushing prices higher, as cited by Yahoo Finance.
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Time for Cyclical Sector ETFs?
Key Takeaways
Markets have been wavering lately as participants closely monitor every piece of Fed-related news. Signs of a U.S. economic recovery are emerging, but the rebound remains uneven. Global market volatility has also increased, mainly because the Iran war-led energy crisis has fueled inflation and pushed interest rates higher worldwide.
Against this backdrop, the Federal Reserve raised its benchmark interest rate by 25 basis points on Wednesday, marking its first rate hike in three years. The unanimous decision lifted the target range to 3.75–4% from 3.5–3.75%, as policymakers sought to contain persistent inflation amid rising oil prices and renewed tensions in the Middle East.
Fed Sees Firmer Economic Growth
Despite inflation concerns, the Fed upgraded its economic growth forecast. GDP is now projected to expand 2.3% in 2026, compared with 2.2% in its previous forecast.
Officials also lowered their unemployment forecast to 4.1% from 4.3%, matching the current unemployment rate. Policymakers noted that domestic spending has remained resilient, although geopolitical uncertainty continues to cloud the outlook.
Cyclicality of Sectors
The U.S. economy continues to show resilience, supported by relatively healthy labor-market data, strong consumer spending and a recovery—although not a brisk one—in several cyclical sectors, including retail. Historically, cyclical sectors tend to outperform defensive sectors when economic conditions improve and interest rates begin to normalize.
These sectors often struggle when the economy contracts but can become major beneficiaries when economic conditions turn more favorable. According to Fidelity, consumer discretionary and financials, along with economically sensitive sectors such as industrials and information technology, tend to perform well during the early stages of an economic recovery.
Fidelity defines the early-cycle phase as a period when economic activity begins to revive, credit starts to grow, monetary policy remains accommodative, and sales and profits improve. Several of these conditions are emerging in the U.S. economy, suggesting that cyclical sectors could attract investor interest in the coming months. However, the Iran war-driven increase in energy prices remains a key risk.
The Fed has already raised rates by 25 basis points this week and may deliver another hike later this year. If so, the increase is likely to be limited to 25 basis points, although the possibility of a larger move cannot be ruled out.
Against this backdrop, several cyclical sectors and related ETFs could benefit from the expected earnings-growth trend. For investors seeking exposure to these areas, we highlight three ETFs with significant exposure to cyclical industries.
ETFs in Focus
State Street Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report)
U.S. retail sales surged 1.2% in August, marking the largest increase since March, following a revised 0.5% decline in July. Sales rose 6.0% year over year in August. The increase was partly driven by higher gasoline prices, which lifted receipts at service stations by 3.1%. Consumers have continued to spend despite sticky inflation, while back-to-school purchases may have provided an additional boost.
The broad increase in sales was led by a 2.6% rise in receipts at non-store retailers. With Amazon accounting for roughly one-fourth of XLY’s portfolio, the ETF could benefit from continued strength in e-commerce. However, increasingly value-conscious consumers could signal weakening conditions for the consumer discretionary and retail sectors if inflation remains elevated.
State Street Technology Select Sector SPDR ETF (XLK - Free Report)
Although technology is a cyclical sector, XLK has significant exposure to artificial intelligence (AI). The technology sector generally underperforms in a higher-rate environment, but some technology giants can act as relative safe havens during periods of market turbulence.
The AI trade continues to benefit from strong structural tailwinds, with hyperscalers expected to significantly increase capital spending. Higher interest rates may create short-term volatility, but they are unlikely to eliminate the long-term demand for AI infrastructure and related technologies.
Roundhill Memory ETF (DRAM - Free Report)
DRAM offers another way to participate in the AI theme. Memory stocks rallied on Sept. 17, 2026, after Intel CEO Lip-Bu Tan said memory demand would remain strong and supply constraints could worsen in 2027, potentially pushing prices higher, as cited by Yahoo Finance.