This Consumer ETF Dropped 13% From Its January Highs -- A Look At How Industry Dynamics Changed Since The Iran War

• Brent crude prices have jumped 12% over the last month. 
• High interest rates, along with persistent inflation, have weighed on consumer discretionary shares. 
• A survey of economists shows U.S. inflation to hit 6%. 

The fallout from escalating energy prices has moved beyond the gas pump and into the corporate boardrooms of the nation’s largest retailers, as the latest earnings cycle reveals erosion of profit margins across the consumer discretionary sector. 

The Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD) has retreated 13% from its January highs, reflecting a sharp shift in market sentiment amid rising geopolitical tensions and energy costs, which are reshaping the retail landscape.

The downturn marks a significant reversal for a sector that began the year with optimism. Since the onset of the conflict in Iran in late February, the dynamics governing consumer spending have been fundamentally altered by supply chain disruptions and a volatile energy market.

Most discretionary companies are signaling concern about sales and margins. Only two discretionary companies mentioned a positive impact from higher oil on first-quarter earnings calls, while the rest mentioned negative impacts or struck a neutral tone, according to data from Trivariate Research’s Adam Parker, accessed by Barron’s. 

“We continue to recommend an Underweight in consumer discretionary, as we suspect [earnings] estimate achievability will be below average for the sector,” Parker wrote 

Energy Costs Surge

A primary driver of the sector's decline has been the rapid escalation of energy prices. Since the start of the Iran war, global oil benchmarks have seen substantial gains as the strategically vital Strait of Hormuz remains effectively closed to a significant portion of global trade.

Brent crude futures rose to $107.06 per barrel on Friday, marking a more than 12% increase over the last month alone. In the United States, West Texas Intermediate (WTI) has surged past $102 per barrel. The rising cost of fuel has acted as a double-edged sword for discretionary firms, simultaneously increasing logistics costs and squeezing average households' disposable income.

Erosion of Operating Margins

For many of the sector’s top constituents, the impact of oil has been most visible in "last-mile" delivery and supply chain logistics. Rising diesel and jet fuel prices have forced companies to choose between raising prices for an already inflation-weary consumer or absorbing the costs internally.

Royal Caribbean expects fuel costs to be about $1.3 billion higher than its earlier full-year forecast of around $1.17 billion, based on current pump prices and after hedging, while many U.S. airline companies have raised concerns about higher jet fuel prices denting margins. 

Analysts at S&P Global, in a note, stated that the recent oil shock could push headline U.S. inflation toward 4%, double its 2% inflation target, but expect the disruption to be temporary. 

RSPD Top Holdings Performance

The Invesco S&P 500 Equal Weight Consumer Discretionary ETF, which provides broader exposure by weighting each of its constituents equally, has seen its top-performing holdings from the start of the year give back much of their gains.

Since the war began, the performance of major constituents has been hit by a combination of high interest rates and falling consumer confidence:

While Amazon’s (AMZN) AWS cloud division continued to perform well, its core retail business felt the weight of the fuel spike. "Our guidance anticipates higher transportation costs related to fuel inflation…," said Brian Olsavsky, Amazon's Chief Financial Officer, during the Q1 earnings call. 

Higher interest rates and rising inflation have also weighed on the share prices and operating margins of other components of the ETF, like Home Depot (HD) and Carvana (CVNA).

US Inflation to hit 6%?

Compounding the sector's woes is a persistent inflationary environment that shows few signs of abating. According to data released Friday, a poll of top economic forecasters by the Federal Reserve Bank of Philadelphia now projects the U.S. inflation rate to hit 6% in the second quarter.

The panel, in the forecast three months ago, expected the consumer price index to rise by just 2.7%. 

RSPD Retail View 

Retail sentiment on Stocktwits was “bullish” with “high” message volumes. 

One user highlighted that the average U.S. consumer is broke and is only buying necessities. 

The ETF has lost 10% year-to-date. 

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