The Resurgence of Consumer Stocks: What's Fueling the Afternoon Rally?

The recent afternoon rally in consumer stocks has captivated investors, driven by a confluence of shifting consumer behavior and macroeconomic tailwinds. As the U.S. economy navigates post-pandemic normalization, the interplay between value-conscious shoppers, AI-driven retail innovations, and Federal Reserve policy has created a fertile ground for sector outperformance.

Changing Consumer Behavior: The New Normal

Consumer spending in 2025 reflects a recalibration of priorities. According to McKinsey's State of the Consumer report, nearly 90% of free time is now allocated to self-focused activities, including digital shopping and social media. This shift has extended the purchase journey: clicks rose 18%, orders increased 12%, but spending grew a mere 0.4% due to a 10% decline in average order value, according to Deloitte's 2025 US Retail Industry Outlook. Retailers are adapting by leveraging AI to enhance demand forecasting and inventory management, with 60% of buyers reporting improved outcomes from such tools, Deloitte finds.

The rise of "value-seeking" behavior is particularly pronounced. Shoppers across income groups are prioritizing affordability, flocking to discount retailers and cost-effective brands, a trend the Deloitte outlook highlights. Meanwhile, e-commerce and grocery delivery services have become entrenched, with over 90% of Chinese and U.S. consumers shopping online, as McKinsey documents. This trend has bolstered off-price retailers and thrift stores, which have seen increased foot traffic as consumers seek budget-friendly, unique purchases, as noted in the U.S. Chamber's 5 Trends Shaping Consumer Spending.

Macroeconomic Tailwinds: AI and Rate Cuts

The Federal Reserve's September 2025 rate cut-the first in nine months-has injected optimism into markets. As noted by Morningstar in the Q3 2025 Market Review and Outlook, this move signaled support for a softening labor market and bolstered investor confidence, particularly in small-cap and international equities. The rate cut, combined with a surge in AI-related investments, has driven the S&P 500 and Nasdaq to record highs, the review notes.

Artificial intelligence has emerged as a key tailwind. Companies investing in AI infrastructure are reaping rewards, with Deloitte forecasting a 15% improvement in conversion rates from AI tools. Goldman Sachs highlights that discretionary cash flow is rising by 5.2%, fueling gains in discretionary stocks like Target and DICK'S Sporting Goods, as reported in a Business Insider article. Even consumer staples, such as Philip Morris and Monster Beverage, are benefiting from improved sentiment, the Business Insider piece adds.

However, macroeconomic fragility persists. Inflation remains above the Fed's 2% target, hovering between 2.5% and 3% due to tariffs and supply chain pressures, the Q3 review observes. Consumer spending is increasingly concentrated among high-income households, with over 50% of U.S. spending coming from households earning $275,000 or more annually, the review also highlights. This bifurcation underscores the uneven recovery, with luxury and tech sectors thriving while the housing market and lower-income consumers struggle.

Implications for Investors

The resurgence of consumer stocks is not uniform. Cyclical sectors like non-ferrous metals and energy have benefited from global AI demand and higher commodity prices, the Q3 review notes. Meanwhile, retailers diversifying partnerships with commerce solutions and deal platforms are outpacing peers reliant on traditional loyalty programs, per Deloitte.

For investors, the key lies in balancing exposure to AI-driven growth and value-oriented retail. Morgan Stanley projects consumer spending growth will slow to 3.7% in 2025 from 5.7% in 2024, and McKinsey's work suggests that the sector's resilience-bolstered by discretionary cash flow and AI efficiency-could sustain continued outperformance.