By Isabel Wang
Tech can’t take all the credit for the stock market’s record rally into a ‘broader, healthier market’ heading into the second half of 2025
After months of leadership by megacap technology stocks, Wall Street kicked off the second half of 2025 with a powerful, yet potentially healthier, shift in the U.S. stock market, as the rally has broadened.
From cyclicals to small caps, more stocks have been joining the charge that has sent the S&P 500 SPX and the Nasdaq Composite COMP to new all-time highs, suggesting that this market’s recovery from April lows may have deeper roots than many anticipated.
Investors have begun rotating out of richly valued technology names and into cyclical sectors when the calendar turned to the second half of the year. The S&P 500’s materials sector XX:SP500.15 was the best performer among the large-cap index’s 11 sectors last week, up 3.6%, while the S&P 500 only rose 1.7%. The financials XX:SP500.40 and energy XX:SP500.10 sectors also gained 2.4% and 2.1% in the same period, respectively, according to FactSet data.
Small-cap stocks also have shown signs of rebounding in the second half. The benchmark Russell 2000 index RUT has popped 3.5% so far this month, outperforming other major large-cap equity indexes. The small-cap index on Thursday also closed in the green for 2025 for the first time since Feb. 20, according to Dow Jones Market Data.
“While the ‘buy everything’ approach worked really well off the April lows, and part of that was simply just a mean reversion trade after tech got asymmetrically punished … so going forward, stock selection is going to be more important and other areas of the market are starting to catch a bid,” said Talley Leger, chief market strategist for the Wealth Consulting Group.
The broadening of the tech rally beyond the so-called Magnificent Seven cohort is a sign of “a broader, healthier market,” he said.
Consumer in focus
Meanwhile, some sectors that lagged in the year’s first half could be poised for a meaningful rebound in the rest of 2025.
The S&P 500’s consumer-discretionary sector XX:SP500.25 was at the bottom of the large-cap index’s 11 sectors in the first six months of 2025, off 4.2% to log its worst first-half performance in three years, according to FactSet data.
However, a look beneath the surface shows the story wasn’t so bleak: Many consumer-related stocks have held steady, and U.S. consumers might be in better shape than sector performance suggests.
The S&P 500 Equal Weight Consumer Discretionary Index XX:SP500EW.25 – which gives equal value to all 51 stocks that are included in the sector, regardless of the size of the company – has actually risen 2.5% this year, according to FactSet data.
Of course, Tesla Inc. (TSLA) – one of the largest-weighted stocks in the S&P 500’s consumer discretionary sector – has been largely to blame. Comprising 18.6% of the total assets within the market-cap-weighted sector index, shares of Tesla have tumbled nearly 22% this year, as weak EV sales, lower demand, intensifying competition from other automakers and Elon Musk’s political involvement have rattled investors.
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Another megacap tech name – Amazon.com Inc. (AMZN) – accounts for roughly 42% of the weighting in the discretionary sector, but its shares have remained relatively steady, rising 1.8% year to date, according to FactSet data.
To be sure, Tesla and Amazon stand on their own perch within the consumer-discretionary sector, which also includes restaurant chains, apparel, luxury goods and travel stocks. Among those are McDonald’s Corp. (MCD), Lululemon Athletica Inc. (LULU) and Airbnb Inc. (ABNB), which all can rise in a resilient economy and labor market when consumers tend to spend more, but fall when unemployment rises.
See: The June jobs report is grimy under the hood. Here’s the down and dirty.
Watch the jobs market
The U.S. economy added a stronger-than-expected 147,000 jobs in June, and the unemployment rate ticked down to 4.1% from 4.2%, according to Bureau of Labor Statistics data released Thursday. Meanwhile, the University of Michigan’s closely watched gauge of U.S. consumer sentiment rose to 60.5 in a preliminary June reading from 52.2 in the prior month. This was the first improvement in six months.
The Wealth Consulting Group’s Leger sees the previously negative consumer sentiment as a potential buying opportunity for the consumer-discretionary sector (see chart below).
“The connection between the University of Michigan consumer-sentiment index and the performance of the consumer-discretionary sector fell into the contrarian buy zone on our radar when everything was at its worst [in April]. Now they are rebounding off those lows, and sentiment or morale is improving,” he told MarketWatch via phone on Wednesday.
In Leger’s view, the surging stock market also adds to “the wealth effect,” which could increase consumer spending power. That, along with the improving consumer sentiment, falling oil prices, cooling headline inflation and potential interest-rate cuts from the Federal Reserve later this year “should release more money for spending on discretionary items,” and “help brighten the earnings outlook” for the sector, he said.
However, Marta Norton, chief investment strategist at Empower Investments, said it’s still too early to “make heads or tails” of consumers’ emotions, as even the potential tariff threat doesn’t feel as concerning as it did when it first made headlines a few months ago.
Americans cut spending in May after buying lots of new cars and other goods earlier in the year to beat U.S. tariffs, underscoring how ongoing trade wars are disrupting the economy. Personal spending fell 0.1% in May, the government said in a June 27 report. It was the first decline since January.
“I wouldn’t describe the consumer as unhealthy at all,” Norton said, but added there has been a marginal deterioration this year. “There is still a certain measure of uncertainty around what that trade policy ultimately looks like,” she said. That also casts a shadow over the long run for earnings of discretionary stocks.
Yet despite recent weakness, the consumer-discretionary sector remains expensive on a price-to-forward-earnings (P/E) basis. The forward P/E multiple of the discretionary sector, calculated by dividing its current price by Wall Street analysts’ consensus estimate for its earnings per share (EPS) for the next 12 months, was pegged at 29.07 as of Wednesday afternoon, up from around 22.56 on April 8. Furthermore, the equal-weighted version of the discretionary index was trading at 17.57 times forward P/E, compared with 13.7 in early April, according to FactSet.
When you add in that the sector’s not necessarily cheap, and that tariff headwinds remain, Norton said it looks tough to see a catalyst for meaningful moves higher for consumer-discretionary stocks.
U.S. stocks finished higher on Thursday as investors digested the June employment report. The Dow Jones Industrial Average DJIA jumped nearly 0.8%, ending only 0.4% off its prior record. The S&P 500 ended up 0.8%, while the Nasdaq Composite gained 1%, with both scoring fresh record closes, according to FactSet data.
Major U.S. stock exchanges were closed on Friday for the July 4 holiday.
-Isabel Wang
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07-06-25 0830ET
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