Defensive Plays and Discretionary Doldrums: Navigating the Consumer Sector's Contradictions

The consumer sector is rarely a monolith. In early 2025, it has split into two distinct narratives: Consumer Staples firms like philip morris international (PM) and Kimberly-Clark (KMB) are navigating a choppy economic environment with mixed results, while Discretionary players such as Tesla (TSLA) and D.R. Horton (DHI) are buckling under the weight of slowing demand and rising costs. Yet, despite uneven earnings, staples stocks have rallied—defying the odds in a market still wary of a recession. What’s driving this divergence, and what does it mean for investors?

The Staples Sector: Defensive Strength, But Not Immune to Headwinds

The Consumer Staples Select Sector SPDR (XLP) rose 0.7% in early May, outperforming the broader market, as investors flocked to defensive bets. At the heart of this shift is Philip Morris International (PM), which delivered a standout quarter. Its Q1 2025 adjusted EPS of $1.69 beat estimates, with smoke-free products like ZYN nicotine pouches accounting for 42% of revenue. . The company’s confidence is palpable: it raised full-year EPS guidance to $7.36–$7.49, a rare show of optimism in a sector rife with caution.

But not all staples companies are thriving. Kimberly-Clark (KMB) reported a 6% YoY revenue decline to $4.84 billion, citing tariffs that could shave $300 million off annual gross margins. The firm slashed its full-year EPS growth forecast to flat, from 6.5%, a stark reminder that even staples aren’t immune to macroeconomic pressures.

Discretionary: The Sector Struggling to Keep Up

The Consumer Discretionary Select Sector SPDR (XLY) fell 0.9% in May, reflecting a sector in disarray. Tesla (TSLA) exemplifies the challenges: its Q1 deliveries dropped 13% YoY to 336,681 units, with net income slipping to $7.13 billion (TTM). Weak demand and competition from cheaper EVs like the BYD Dolphin have left investors skeptical. .

Meanwhile, homebuilders like D.R. Horton (DHI) and PulteGroup (PHM) are grappling with affordability crises. While PulteGroup beat Q1 estimates by boosting buyer incentives, D.R. Horton’s Q2 revenue of $7.7 billion missed forecasts, prompting a cut to its full-year outlook. The real estate slowdown isn’t confined to homes: CarMax (KMX) reported its fourth straight quarter of declining revenue, with vehicle sales falling short of expectations.

Why Are Staples Outperforming Discretionary?

The answer lies in investor psychology. With Q1 GDP contracting by 0.3% and personal spending growing at just 1.8%—the slowest pace since 2023—consumers are prioritizing essentials over discretionary purchases. Staples firms, which sell products like tobacco, household goods, and groceries, benefit from inelastic demand. Even Kimberly-Clark’s struggles with tariffs haven’t erased its status as a necessity-based business.

Discretionary companies, however, are caught in a vise. PCE inflation at 3.6% continues to erode purchasing power, while tepid job growth (ADP reported just 62,000 private-sector jobs in April) has dampened consumer confidence. “Investors are voting with their wallets,” said one fund manager. “They’re saying, ‘Why bet on big-ticket items when the economy might tank?’”

The Data Behind the Divide

• Tariffs and Margins: Kimberly-Clark’s $300 million annual tariff drag highlights a growing pain point for manufacturers.
• Guidance Gaps: Staples firms like Philip Morris are raising guidance, while discretionary companies such as CarMax are suspending long-term targets.
• Stock Performance: The XLP’s 0.7% May gain vs. the XLY’s 0.9% decline underscores the sector split.

Conclusion: Play Defense, But Watch the Macro

The consumer sector’s bifurcation offers a clear roadmap for investors: prioritize staples while avoiding discretionary stocks until macroeconomic clarity emerges. Philip Morris’s smoke-free product growth and Kimberly-Clark’s (despite tariffs) essential role in households make them safer bets.

But this isn’t a free pass. The 3.6% PCE inflation rate and tepid GDP data suggest the economy is far from stable. If staples companies like Albertsons (ACI)—which fell despite an earnings beat—continue to face margin pressures, even this sector could falter.

For now, the market’s message is clear: defensive plays are in, but don’t bet the farm on consumer discretionary until the economy rights itself. The data speaks, and it’s telling investors to stay cautious.

Ask Aime: Why are Consumer Staples stocks like Philip Morris International and Kimberly-Clark performing well despite mixed results, while Discretionary stocks such as Tesla and D.R. Horton struggle?