Analyst sees upside in laggard consumer discretionary sector despite oil surge

Oil prices have remained above $100 a barrel for most of the past month, driven by the Iran war which has pushed crude, gas, and diesel prices higher. While the energy sector has become the top performer in the S&P 500 with year-to-date gains exceeding 50%, The Motley Fool suggests this may be the wrong strategy for future returns. The outlet argues that history points to the sector suffering the most, consumer discretionary, as a better long-term investment opportunity.

Energy stock prices typically rise with oil, but this correlation does not guarantee indefinite gains. Data from YCharts shows a strong link between the State Street Energy Select Sector SPDR ETF (XLE) and the United States Brent Oil Fund (BNO). If oil prices level out, energy stocks are likely to stagnate. With annualized inflation at 3.7% in September and consumers facing an affordability crisis, current oil price increases are attributed to supply concerns from the Iran conflict rather than higher demand.

The Motley Fool posits that when the war ends and global supply chains normalize, oil prices will likely fall, leading to a potential sharp correction in energy stocks. Consequently, energy stocks could underperform over the next six to 12 months. In contrast, consumer discretionary stocks have been poor performers this year due to high inflation. The State Street Consumer Discretionary Select Sector SPDR ETF (XLY) is the worst-performing sector, down 7% and trailing the S&P 500 by roughly 20 percentage points.

Despite durable personal spending, consumer sentiment remains near all-time lows as high costs for gas, groceries, and clothing pressure households. The outlet identifies a long-term opportunity for investors willing to buy low. If the Iran conflict ends, inflation should decrease and optimism should return. A recent precedent exists in 2022 and 2023: while Brent crude rose 35% in 2022 and XLY fell 36%, the dynamic reversed in 2023 when inflation cooled. That year, Brent crude finished down about 3% while the consumer discretionary sector gained around 40%. This pattern suggests XLY could offer significant outperformance as a less popular pick in the current market.