Gains in consumer stocks may offer clues to resilience of US economy By Reuters

by david randall

NEW YORK (Reuters) – Investors await earnings reports from consumer discretionary companies in the coming weeks to see how the U.S. economy is faring amid stubbornly high inflation and the most aggressive rate-hike cycle in the Federal Reserve since the 1980s.

Consumers have largely remained strong over the past year, even as interest rates have increased the cost of home loans for credit card financing. However, widespread layoffs in the first quarter have hurt wealthy tech workers, while the recent regional banking crisis has reduced available credit for households, which could dampen the prospects for spending on entertainment, restaurants, cars and hotels. .

“We’re in this push and pull narrative between a hard landing and a soft landing for the economy, but if we see some strength in the consumer, it could reinforce the story that some of these worst case scenarios won’t play out,” Garrett Melson said. , Portfolio Strategist at Natixis Investment Managers Solutions. He is bullish on homebuilders and appliance makers in anticipation of a rebound in the housing market.

Corporate results and the outlook are taking on greater importance this earnings season, as investors assess whether last month’s monetary tightening and banking sector turmoil are affecting overall growth.

The big banks kicked off earnings season on Friday, with JPMorgan Chase & Co (NYSE:), Citigroup Inc (NYSE:) and fargo wells (NYSE:) & Co beating Wall Street expectations. Companies in the consumer discretionary spending sector reporting next week include Tesla (NASDAQ:) Inc, Netflix Inc (NASDAQ:) and AutoNation Inc (NYSE:). Amazon.com Inc (NASDAQ:), a major component, is expected to post earnings on April 27.

Estimated earnings growth rates for the first quarter of 2023 https://www.reuters.com/graphics/MARKETS-EARNINGS/CONSUMER/dwpkdjqwqvm/chart.png

Growing recession fears over the past year have already prompted many consumer discretionary companies to cut costs to boost margins, which may lead to positive earnings surprises this quarter, Melson said.

Overall, analysts expect companies in the consumer discretionary sector to increase their profits by 36.5% in the first quarter of 2023 compared to a year earlier, the largest increase of any sector, according to Refinitiv data. That compares with an expected 5.2% decline in earnings growth for the S&P 500 overall.

Part of that expected growth comes from a job market that has remained strong, helping boost consumer spending, said Jamie Cox, managing partner at Harris Financial Group.

“Consumers continue to travel and spend money on high-end merchandise and people continue to enjoy themselves,” he said.

The sector, with its nearly 40% weighting in Tesla and Amazon, is up about 14% year-to-date, nearly double the nearly 8% gain in the broad S&P 500. Tesla are up almost 50% year to date, while Amazon is up almost 22%.

At the same time, the Consumer Discretionary Select SPDR ETF has posted positive inflows in five of the past six weeks, as investors sent a net $229.1 million into the fund, its biggest net inflow in six weeks since August, according to Lipper data.

Some investors, however, believe the estimates may be too rosy, especially after last month’s crisis at regional banks fueled concerns about a sharp cut in lending.

“I think there’s a lot of optimism in this sector because of the notion that consumers are going to stay strong forever, but that’s ignoring what’s happened in the last month and a half,” said Kevin Gordon, senior investment strategist at charles schwab (NYSE:).

Data on Friday showed that US retail sales fell more than expected in March as consumers cut back on purchases of motor vehicles and other big-ticket items, suggesting the economy was running out of steam at the end of the first quarter. Meanwhile, US consumer confidence rose in April, but households expected inflation to pick up over the next 12 months.

Sandy Villere, portfolio manager at Villere & Co, has selected his holdings in consumer discretionary stocks in anticipation of a recession later this year.

While he remains bullish on shares in companies including Caesars (NASDAQ:) Entertainment Inc and Swiss-based shoe company On Holding AG, Villere has cut allocations for the broader sector. Once it’s clear that a recession has struck, he hopes to buy shares in the retailers affected by the slowdown.

“We expect the market to look tougher in July and August, and if you see discretionary retailers get hit and oversold, that’s generally an opportunity where we would switch and play offense,” he said.