Consumer Sentiment, Orders, and Penetration: Growth Signals for Discretionary Stocks

Consumer confidence remains a critical barometer for economic health, with two key indicators painting a nuanced picture. The University of Michigan Consumer Sentiment Index (ICS), normalized to 100 in 1966 Q1, surveys over 500 U.S. households monthly to gauge attitudes toward personal finance, the economy, and spending patterns. Its Consumer Expectations sub-index even feeds into the Commerce Department's leading economic indicators according to the University of Michigan.

Recently, the Conference Board's November 2025 Consumer Confidence Index slipped to 88.7, with its Expectations sub-index below 80 for ten straight months-an unbroken streak signaling persistent recession risks according to the Conference Board. This decline reflects widespread anxiety over jobs, incomes, and household finances, largely driven by stubborn inflation and the lingering effects of the government shutdown.

While consumers' 12-month stock price expectations stayed positive, even if slightly softer, their spending plans for big-ticket items like appliances and cars, as well as services, have deteriorated. This cautious approach reveals a split in sentiment: optimism about financial markets coexists with frugality in everyday purchases.

The persistent weakness in expectations-coupled with inflationary pressures-suggests discretionary spending will remain subdued in the near term. Even as stock market hopes linger, the erosion in confidence around income stability could delay recovery in sectors reliant on big-ticket purchases. For households, the tension between holding stocks and cutting non-essentials underscores a cautious roadmap ahead.

Sentiment-Driven Growth Metrics

Building on earlier analysis, sentiment-driven metrics reveal nuanced patterns in discretionary stock performance beyond surface trends. A study covering 2000 to 2022 found a statistically significant positive correlation between consumer confidence indices and stock returns, especially in consumer discretionary sectors according to research. This relationship positions sentiment as a leading indicator for equity markets, suggesting that improving confidence often precedes stronger stock performance.

However, the study also highlighted lagged effects and regional variations in this correlation. For example, a 2022 case study showed temporary divergence between sentiment and market outcomes during economic uncertainty, underscoring that sentiment alone isn't always predictive without considering timing and local conditions.

Current demand metrics reinforce this leading indicator role. In August 2024, the unfilled orders-to-shipments ratio climbed to 6.93 according to the U.S. Census Bureau, up from 6.86 in July, indicating persistent demand pressure in manufacturing. Shipments fell slightly by 0.1% to $607.7 billion, showing supply chain tightness but not erasing underlying strength.

Meanwhile, digital adoption is surging, with U.S. online grocery sales hitting 61% household penetration and 36% YoY delivery growth as of July 2024 according to Grocery Dive. This rapid growth in convenience-driven spending suggests rising discretionary consumption, particularly as mass retailers leverage free delivery and membership programs to boost repeat business.

Together, these indicators-high penetration rates and robust demand signals-can serve as leading proxies for discretionary market health, potentially offsetting recent sentiment declines by reflecting tangible activity. Looking at penetration rate first, the 61% digital penetration with 36% growth signals strong momentum, which could drive future spending. With orders/shipments ratio above 1, it confirms sustained demand pressure.

But risks persist. The lagged effect means stock reactions may not be immediate, and regional variations could limit broader applicability. Additionally, while mass retailers thrive, regional grocers face headwinds with declining online order rates, highlighting uneven adoption and competitive challenges. These nuances suggest that while sentiment and demand metrics offer valuable insights, they require careful calibration to avoid overoptimism.

Growth Constraints and Vulnerabilities

Building on the broader discretionary sector's resilience, certain areas face headwinds that could undermine spending momentum. The auto and home-improvement segments, key drivers of discretionary spending, lagged in 2024 due to delayed purchases amid economic uncertainty, despite overall sector outperformance according to Fidelity Insights. This lag reflects heightened sensitivity to borrowing costs and consumer hesitation, risks that could intensify if macro conditions worsen. For instance, auto sales are particularly vulnerable to interest rate fluctuations, and housing inventory remains constrained by aging stock and slow supply chains.

Meanwhile, online grocery penetration reached 61% of households in July 2024, with sales totaling $10 billion according to Grocery Dive, but this growth masks persistent frictions. Regional grocers, lacking the scale of mass retailers, face declining order rates and fulfillment barriers such as high delivery costs and logistics inefficiencies. Repeat customers spent 50% more per order than new users, highlighting loyalty gaps that favor larger players with membership programs offering free delivery. These constraints suggest that digital adoption, while high, does not translate uniformly across all players, creating substitution frictions that could dampen market vibrancy.

If economic conditions deteriorate, these vulnerabilities could decouple consumer sentiment from discretionary spending. For example, delayed auto purchases might accelerate sharply with a rate cut, but regional grocers could lose relevance faster than they adapt to digital shifts. The challenge lies in balancing growth priorities-such as expanding online penetration-with managing frictions like delivery costs and competitive imbalances, which require strategic investments that not all players can afford.

2025 Catalysts and Scenario Outlook

The consumer discretionary sector stands at a critical inflection point in 2025, with three key catalysts poised to shape performance and valuation. These include monetary policy shifts, manufacturing momentum indicators, and generational digital adoption patterns. Each presents significant upside potential but carries distinct adaptation challenges that could temper outcomes.

The most prominent near-term catalyst is the Federal Reserve's anticipated rate cuts, which could ease borrowing costs across the sector. Earlier sector analysis highlighted how wage growth outpacing inflation combined with rate cut expectations created a favorable environment for discretionary spending according to Fidelity Insights. This momentum could accelerate in 2025 if labor market stability holds, particularly benefiting rate-sensitive categories like autos and housing. However, this upside hinges on broader economic resilience-if inflation rebounds unexpectedly or policy shifts prove less accommodative than anticipated, the borrowing cost relief could materialize too late to significantly lift sentiment.

Manufacturing indicators suggest underlying earnings momentum that could support sector valuations.

The unfilled orders-to-shipments ratio climbed to 6.93 in August 2024, well above the 6.8 threshold signaling sustained demand pressure according to the U.S. Census Bureau. This imbalance reflects persistent supply chain constraints that may eventually ease, but could also indicate inventory buildup risks if demand softens. While this ratio suggests near-term production strength, companies must carefully manage inventory levels to avoid margin compression if demand decelerates faster than supply chains adapt.

Digital behavior shifts are creating new growth channels, particularly driven by Gen Z's preference for social media discovery. The 2024 eMarketer report shows this generation relies heavily on platforms like TikTok and Instagram for product research, fundamentally altering retail marketing dynamics according to eMarketer. Retailers tailoring strategies to social-first discovery could capture significant market share as Gen Z's spending power grows. Yet this presents substantial adaptation challenges-companies must invest in new digital capabilities and fulfillment models while navigating privacy regulations that increasingly restrict social media targeting. Those unable to pivot risk losing relevance to competitors with stronger social commerce integration.

The convergence of these catalysts creates a complex but promising outlook. Rate cuts could unlock pent-up demand, while manufacturing momentum demonstrates underlying resilience. Meanwhile, Gen Z's digital adoption patterns signal structural shifts toward social-driven commerce. Success will depend on companies balancing these opportunities with execution risks-from inventory management to digital transformation-while monitoring policy and economic developments that could alter the trajectory of these catalysts.