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Banks (Finance)

Consumer Discretionary Stocks Face Challenges Amidst Rising Inflation and Interest Rates

Strategic Insights

— 1 min read

Rising inflation, high interest rates, and fears of recession have significantly impacted consumer discretionary stocks, making them the weakest-performing sector of the market so far this year. The S&P 500 Consumer Discretionary index has declined 18.2% year-to-date through August 10. Bank of America analysts attribute this trend to historical patterns, where the sector underperforms in late economic cycles marked by wage inflation, rising energy prices, and tightening by the Federal Reserve.

Key Takeaways:

  • The S&P 500 Consumer Discretionary index has slid 18.2% year-to-date through August 10.
  • Consumer discretionary stocks are traditionally weak performers in late economic cycles characterized by wage inflation, rising energy prices, and Fed tightening.
  • Profit margins for covered restaurants have compressed by an average of 400 basis points (4 percentage points) compared to 2021 and 200 basis points compared to the first half of 2019.
  • The sector is dominated by Amazon (AMZN) and Tesla (TSLA), which can distort the sector's valuation metrics.
  • Small-caps in the sector appear inexpensive on most measures and compared to large peers.
  • Sentiment on the discretionary sector is deeply negative due to rising inflation and recession fears.
  • Investors have been shifting out of consumer discretionary stocks and into defensive sectors, according to Bank of America's Fund Managers Survey.
  • Stocks like Starbucks, Lululemon Athletica, Harley Davidson, Home Depot, Lowe's, Floor & Decor, and D.R. Horton are poised to rebound if the Fed eases monetary policy.

Statistics:

  • 18.2%: Decline in the S&P 500 Consumer Discretionary index year-to-date through August 10.
  • 400 basis points (4 percentage points): Average compression in profit margins for restaurants covered by Bank of America analysts, compared to 2021.
  • 200 basis points: Average compression in profit margins for restaurants covered by Bank of America analysts, compared to the first half of 2019.
  • 4 percentage points: Average decrease in forward price-earnings multiples for small-caps in the sector.

Sources:

  • Bank of America analysts
  • S&P 500 Consumer Discretionary index
  • Fund Managers Survey by Bank of America
  • Client-flows data by Bank of America

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