We’ve been critical of AI stocks for a long time, and we still do today. But they’re not the only good stocks to buy on the market right now.
We are also big fans of consumer stocks at the moment.
Today, Nordstrom (JWN), Abercrombie & Fitch (ANF), Foot Locker (FL), And Tough (CHWY) all recorded positive sales growth and positive
Sales. Consumers are clearly still spending money, so the bull thesis on consumer stocks is pretty clear.
But while stock markets have soared since late 2022 on AI euphoria, even the best consumer goods stocks have lagged noticeably.
The Global X Artificial Intelligence and Technology ETF (AIQ) has essentially doubled from its late 2022 lows and has risen to all-time highs. In the meantime, SPDR S&P 500 ETF (XRT) has recovered less than 40% from its late 2022 low and remains 25% below its all-time high.
Why? Interest charges.
Although stock prices have risen since late 2022, interest rates have also risen. This new bull market began in October 2022. At that time, the Fed Funds rate was 3%. Over the next nine months, the Fed raised interest rates nine times until the Fed Funds rate rose to 5.25%.
This sharp rise in interest rates has impacted consumer market share prices.
Car financing rates have risen …
Interest rates for financing large projects have increased …
Credit card interest rates have risen …
At the same time, money has become more expensive and consumers have become more selective in their spending.
But that will soon change.
Powell to the rescue
Fed Chairman Jerome Powell signaled last week that interest rate cuts – not rate hikes – were imminent.
The market expects the Fed to cut interest rates for the first time this cycle in September and then cut them again in November, December and January, March, May and June of next year.
Overall, the market expects the Fed to cut interest rates eight times by the summer of next year.
This means lower mortgage interest rates…
Lower car financing rates …
Lower interest rates on debt financing …
Lower credit card interest rates …
And that of course means more consumer spending.
Most of the above-mentioned retailers who reported positive earnings trends also mentioned that inflationary pressures continue to ease. This is in line with the weak price survey data we have observed in recent weeks and falling oil prices.
So we are seeing robust economic activity and declining inflation pressures ahead of what are likely to be numerous interest rate cuts in the final months of 2024.
This is a recipe for a broad strengthening of the economy.
The last word on consumer stocks
Consumer spending has slowed significantly over the past two years, especially here in 2024 as consumers suffer from higher interest rates. For all of 2022, retail sales growth was over 5%. In 2023, retail sales growth slowed to about 3.6%. In 2024, average retail sales growth so far has been about 2.5%.
Consumption dynamics have declined for two years in a row.
That will change over the next two years. Lower interest rates will help revive consumers and enable accelerated retail sales growth. We expect retail sales to grow more than 3% next year and possibly more than 4% the year after that.
As consumer spending picks up again in 2025/26, consumer stocks are likely to benefit from strong earnings growth. Earnings per share in 2025/26 S&P 500 Consumer Discretionary The sector is expected to grow by 12% in 2025 and 14% in 2024, representing growth of almost 30% over the next two years.
At the same time, consumer stocks currently appear cheap. The average earnings multiple in the S&P 500 consumer discretionary sector is currently 26, compared to an average earnings multiple of 33 over the past five years. In a more benign interest rate environment, consumer stocks could trade at their average earnings multiple of 33, implying potential for a ~25% multiple increase over the next two years.
With a profit increase of 30% and an increase in sales of 25% Consumer goods stocks could realistically gain more than 50% over the next two years.
The best consumer goods stocks could gain even more.
And that’s why we’re extremely optimistic about consumer stocks right now.
Click here to see some of the top consumer goods stocks we currently have on our radar.
At the time of publication, Luke Lango had no position (either directly or indirectly) in the securities mentioned in this article.
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