Fed Rate Hike: Will Consumer Discretionary Stocks Get Squeezed?

The Federal Reserve is poised to raise interest rates by a quarter-point at its upcoming FOMC meeting, as inflation numbers and crude oil prices surge. This move will likely squeeze consumers' ability to spend on discretionary goods, putting stocks like Amazon and Home Depot directly in the crosshairs.

Higher interest rates will increase borrowing costs for consumers, cutting disposable income and slowing sales velocities across discretionary retail items. This will particularly affect e-commerce platforms like Amazon's, as well as credit-dependent businesses such as major homebuilders and automotive manufacturers like Tesla.

The 10-year Treasury yield is currently at its highest since 2007, compressing equity growth valuations for discretionary stocks. The S&P 500 index has averaged a 9% return over the 12 months following the first rate hike of seven prior hiking cycles, according to Goldman Sachs' strategists.

Consumer discretionary ETFs like State Street's Consumer Discretionary Select Sector SPDR ETF (XLY) and iShares Global Consumer Discretionary ETF (RXI) hold significant weightings in stocks like Amazon, Tesla, and Home Depot. These funds have seen notable outflows as hike odds rose, but history suggests a resilient long-term outlook.