Consumer discretionary stocks are ahead

A new report from analysts at Bank of America found that consumer discretionary stocks have an edge over consumer staples stocks.

This is despite the one-month outperformance of the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP relating to SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY.

Analysts at Bank of America found that consumer discretionary stocks are trading at a premium to historical valuation measures, while consumer staples stocks are trading at a discount.

However, excluding some high-flyers, such as Amazon.com Inc. NASDAQ:AMZNwhose price/earnings ratio is 62, e Tesla Inc. NASDAQ:TSLAwhose P/E is equal to 52, consumers’ discretionary assessments appear more reasonable.

Sector forward P/E slightly below average

“The sector’s forward relative P/E excluding these stocks is now below its long-term average,” Bank of America said.

By market capitalization, these two stocks represent nearly 40% of the market capitalization of the S&P 500 Consumer Discretionary sector. This means they have a huge influence on the sector’s performance.

Tesla’s one-month decline of 18.40% dampened the sector’s performance. However, this also means it has less influence on the industry.

Tesla was the worst performing consumer discretionary on a monthly basis.

Amazon outperforms the S&P 500 Index

Amazon, meanwhile, posted a seemingly modest 4.54% gain, but that beat its 2019 average SPDR S&P 500 ETF Trust Fund NYSEARCA: SPY yield of 3.29%.

The top one-month results in the Consumer Discretionary sector and their returns are:

AutoZone has the heaviest sector weight in that group at 1.62%, meaning that none of these stocks have much influence on the overall sector performance.

However, for stock pickers, the sector can offer potential.

Resilience despite continuing inflation

With investors increasingly concerned about inflation proving to be anything but “transient,” consumers remain resilient.

According to analysts at B of A, there are a few reasons for this, including:

• About 90% of mortgage loans in the United States are fixed rate. The current effective mortgage rate of 3.8% remains below pre-pandemic levels, contributing to consumer resilience.
• Trends in automation show a renewed focus on efficiency among consumer discretionary companies, resulting in smoother earnings and multiple expansions.

Chipotle as a consumer case study

Chipotle Mexican Grill Inc. New York Stock Exchange: CMG exemplifies the strength of the industry.

THE Chipotle Mexican Grill Chart shows that the stock returned 20.78% over the past three months and continued its uptrend even as the S&P 500 index retreated.

Wall Street expects double-digit earnings growth this year and next.

Bank of America analysts cited increased automation and higher productivity as reasons for the strength in consumer discretionary, highlighting Chipotle as at the forefront of automation investments.

Notably, Chipotle reported a 38% increase in digital sales in the fourth quarter of 2023, compared to 11% growth in the third quarter of 2018. As the company has rapidly grown sales and earnings, labor costs per store are growing less than expected. , suggesting productivity gains.

Emerging market potential for discretionary consumers

As has increasingly been the case in recent decades, large companies operate globally. This means that the strength or weakness of the large-cap sector is not necessarily limited to clients in the United States

This is also boosting the fortunes of consumer discretionary companies, as consumers in developing markets like India have greater spending power.

Emerging economies have historically represented growth opportunities, albeit with greater risks than developed economies.

Consumer discretionary investors should not overlook this fact: According to Bank of America, the Colgate-Palmolive NYSE:CL The Indian business unit has outperformed its global parent company over the past five years.

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