Investors are eagerly waiting for the upcoming
earnings reports from consumer discretionary
companies to determine how the US economy
is faring amidst high inflation and the Federal
Reserve's rate hiking cycle. Consumer
spending has remained steady over the past
year, despite rising interest rates that have
increased the cost of mortgage loans and credit
card financing. However, with the recent
regional banking crisis and layoffs in the
technology industry, the outlook for spending
on entertainment, restaurants, autos, and
hotels could be affected.
Portfolio strategist Garrett Melson of Natixis
Investment Managers Solutions is optimistic
about the housing market and expects a
rebound, which could be beneficial for
homebuilders and appliance makers. The
importance of corporate results and outlooks is
increasing this earnings season as investors
attempt to gauge whether monetary tightening
and the banking sector crisis of last month are
negatively impacting overall growth.
The earnings season kicked off with big banks
such as JPMorgan Chase & Co, Citigroup Inc,
and Wells Fargo & Co beating Wall Street
expectations. Consumer discretionary
spending companies set to report next week
include Tesla Inc, Netflix Inc, and AutoNation
Inc. Amazon.com Inc, a major component, is
set to release earnings on April 27. There have
been concerns over a potential hard landing for
the economy, but if the consumer spending
sector displays strength, it could suggest that
some of the worst-case scenarios will not play
out.
Analysts predict that companies in the S&P
500 consumer discretionary sector will grow
earnings by 36.5% in the first quarter of 2023
compared to the same period last year, which
is the greatest increase among all sectors,
according to Refinitiv data. This compares with
an expected 5.2% decline in earnings growth
for the S&P 500 overall.
Job market strength has been one of the main
factors buoying consumer spending, according
to Jamie Cox, managing partner for Harris
Financial Group. Consumers are still spending
money on high-end merchandise and
travelling, indicating that the sector has
remained resilient. The sector has performed
well this year, with nearly 40% of its weighting
in Tesla and Amazon, up around 14% year-to-
date, nearly double the almost 8% gain in the
broader S&P 500. Tesla's shares have risen
nearly 50%, while Amazon's are up nearly
22%.
Despite the sector's positive performance,
some investors believe that the estimates may
be too optimistic, particularly after last
month's crisis in regional banks, which has
raised concerns over a sharp cutback in
lending. Kevin Gordon, senior investment
strategist at Charles Schwab, warns that there
is a lot of optimism embedded in this sector
and that the recent events may have been
ignored.
Sandy Villere, a portfolio manager at Villere &
Co, is trimming his holdings of consumer
discretionary stocks in anticipation of a
recession later this year. Although he remains
bullish on some companies in the sector, he is
planning to buy shares of retailers affected by
the slowdown once it becomes clear that a
recession has taken hold. He expects the
market to become rougher in July and August,
and if discretionary retailers are hit and
oversold, that could be an opportunity to
switch and play offense.
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