Consumer stocks' earnings may offer clues on U.S. economy’s resilience
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[April 15, 2023] By
David Randall
NEW YORK (Reuters) - Investors are awaiting earnings reports from
consumer discretionary companies in coming weeks for a read on how the
U.S. economy is faring amid persistently high inflation and the Federal
Reserve's most aggressive rate hiking cycle since the 1980s.
Consumers have largely held strong over the last year even as interest
rates raised costs for mortgage loans to credit card financing. Yet
widespread layoffs in the first quarter have hit affluent technology
workers while the recent regional banking crisis has pulled back
available credit for households, potentially squeezing the outlook for
spending on entertainment, restaurants, autos and hotels.
"We're in this narrative tug of war between a hard landing and a soft
landing for the economy, but if we see some strength in the consumer it
could bolster the story that some of these worst-case scenarios won't
play out," said Garrett Melson, portfolio strategist with Natixis
Investment Managers Solutions. He is bullish on homebuilders and
appliance makers in anticipation of a rebound in the housing market.
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Corporate results and outlooks are taking on added importance this
earnings season, as investors gauge whether monetary tightening and last
month's banking sector mess are denting overall growth.
Big banks' kicked off the earnings season on Friday, with JPMorgan Chase
& Co, Citigroup Inc and Wells Fargo & Co beating Wall Street
expectations. Companies in the consumer discretionary spending sector
reporting next week include Tesla Inc, Netflix Inc and AutoNation Inc.
Amazon.com Inc, a major component, is expected to release earnings on
April 27.
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Growing recession fears over the last 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 S&P 500 consumer discretionary
sector to grow earnings by 36.5% in the first quarter of 2023 compared
with a year earlier, the greatest 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
robust, helping buoy consumer spending, said Jamie Cox, managing partner
for Harris Financial Group.
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People shop at a Target store in
Chicago, Illinois, U.S., November 25, 2022. REUTERS/Jim Vondruska
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"Consumers are still traveling and spending money on high-end
merchandise and people are still living it up," he said.
The sector, with nearly 40% of its weighting in Tesla and Amazon, is
up around 14% for the year to date, nearly double the almost 8% gain
in the broad S&P 500. Shares of Tesla are up nearly 50% for the year
to date, while Amazon is up nearly 22%.
At the same time, the Consumer Discretionary Select SPDR ETF has
posted positive inflows in five of the last six weeks as investors
sent a net $229.1 million to the fund, its largest six-week net
inflow since August, according to Lipper data.
Some investors, however, believe estimates may be too rosy,
especially after last month's crisis in regional banks fueled
worries over a sharp cutback in lending.
"I think there's a lot of optimism embedded in this sector because
of this notion that consumers will 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.
Data on Friday showed U.S. 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 losing steam at the end
of the first quarter. Meanwhile, U.S. consumer sentiment inched up
in April, but households expected inflation to rise over the next 12
months.
Sandy Villere, a portfolio manager at Villere & Co, has winnowed his
holdings of consumer discretionary stocks in anticipation of a
recession later this year.
While still bullish on shares of companies such as Caesars
Entertainment Inc and Swiss-based shoe company On Holding AG,
Villere has trimming allocations to the sector overall. Once it is
clear a recession has taken hold, he hopes to buy shares of
retailers hit by the slowdown.
"We're expecting the market to look rougher in July and August, and
if you did see discretionary retailers get hit and oversold that's
usually an opportunity where we would switch and play offense," he
said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard
Chang)
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