Consumer Discretionary Sector Under Pressure: Navigating the Downturn in Consumer Confidence

The Consumer Discretionary Sector is facing a crossroads in 2025. While some companies are thriving amid shifting consumer priorities, others are grappling with margin compression, operational headwinds, and a fragmented market landscape. This bifurcation-where winners and losers are increasingly defined by strategic agility-demands a nuanced approach for investors. Let's break down the forces at play and how to position portfolios for resilience.

A Sector Split at the Seams

The sector's divergence is stark. On one side, travel and experience-driven companies like Expedia Group (EXPE) are riding a wave of demand. In Q3 2025, Expedia reported an adjusted EPS of $7.57 and $4.41 billion in revenue, fueled by a 12% surge in gross bookings and a 26% year-over-year jump in B2B segment growth, according to a Wral Market Minute. This reflects a broader consumer shift toward spending on travel and leisure, even as broader economic uncertainties persist.

Conversely, companies like Target Hospitality (TH) and American Hotel Income Properties REIT (AHIP) are struggling. TH, despite a 16.5% revenue beat in Q3, saw its operating margin collapse to 0.1% from 29.4% in 2024, dragged down by non-recurring revenue and underutilized assets, according to a TradingView analysis. AHIP, meanwhile, faced a 322-basis-point margin decline to 29%, as rising labor and maintenance costs offset a 1.9% increase in RevPAR, according to an Yahoo Finance earnings call summary. These cases highlight how operational inefficiencies and rigid business models are amplifying pain in a sector once defined by flexibility.

Margin Compression: The New Normal?

The pressure on profit margins isn't just a short-term blip. Consumer borrowing has slowed dramatically in 2025, with total credit growth rising by just $6 billion in September-a sign households are tightening belts amid high interest rates, according to a Wral Market Minute. This has hit companies reliant on discretionary spending, particularly in retail and auto financing.

Yet some firms are adapting. Carnival Corporation (CCL) is leveraging asset divestitures and fleet modernization to boost future cash flow, while Life Time Group (LTH) is capitalizing on its premium wellness model, boasting strong membership retention and operating leverage, according to an AMG Q3 deep dive. These players are proof that strategic reinvention-not just cost-cutting-can unlock value.

On the flip side, Ares Management (ARES) illustrates the risks of overreliance on one-off gains. Despite a 92.3x trailing P/E, its net profit margin has fallen to 7.7% in 2025 from 11.7% the prior year, raising questions about the sustainability of its growth narrative, according to an AMG Q3 deep dive. Investors must ask: Is the company's premium valuation justified, or is it masking structural weaknesses?

Strategic Positioning: Where to Play and Where to Avoid

The key to navigating this sector lies in identifying companies that are proactively reshaping their business models. For instance, TH's pivot into data centers and power generation-aiming to convert low-margin construction projects into recurring services-signals a path to long-term profitability, according to a TradingView analysis. Similarly, AHIP's focus on asset optimization and cost discipline could stabilize its margins if executed effectively, according to an Yahoo Finance earnings call summary.

However, caution is warranted for firms stuck in legacy models. The sector's bifurcation means that laggards-those unable to adapt to higher borrowing costs or shifting consumer preferences-will face mounting pressure. This is where the "perma-bull" narratives of 2023-2024 are being tested.

The Bottom Line

The Consumer Discretionary Sector is no longer a monolith. While travel and experience-driven companies are defying the headwinds, others are being squeezed by margin compression and structural inefficiencies. For investors, the playbook is clear: favor firms with pricing power, operational agility, and a clear path to margin expansion. Avoid those clinging to outdated strategies or relying on temporary fixes.

As we head into the final stretch of 2025, the sector's performance will hinge on how well companies can align their strategies with the realities of a more cautious consumer. Those that succeed will be the ones that not only survive the downturn but position themselves to thrive in the next upcycle.