Despite the recent weakness in the markets, consumer discretionary stocks and sector-related exchange traded funds could outperform in the upcoming earnings season.
Adam Parker, Morgan Stanley US Equity Strategist and Director of Quantitative Research, argues that the S&P 500 can generate 3% to 4% organic earnings growth for the year, with consumer discretionary leading the charge, reports Tom DiChristopher for CNBC.
“The bottom-up consensus numbers are for zero earnings growth this year, and we think that’s probably not right,” Parker told CNBC. “With two whole quarters of earnings ahead of us, you’re going to see some benefits to companies that clearly will do well with lower oil and lower rates.”
The bank recently reiterated its overweight outlook on consumer discretionary on signs that shoppers are finally spending some of the fuel savings in a low oil environment. For instance, Amazon (NasdaqGS: AMZN) first annual Prime Day on July 15 was bigger than last year’s Black Friday event, and Wal-Mart (NYSE: WMT), the country’s largest retailer, recently revealed positive same-store sales growth.
Morgan Stanley holds about 17% of its portfolio in consumer discretionary.
On Monday, the Commerce Department also revealed that U.S. household spending increased 0.4% in August month-over-month, with personal income rising 0.3%, reports Jeffrey Sparshott for the Wall Street Journal.
“Overall consumer spending remains robust and highlights a solid employment backdrop,” Bricklin Dwyer, a senior economist at BNP Paribas, said in a note. “We expect firm spending ahead as employment remains solid and wages begin to accelerate.”
For exposure to the retail space, the Market Vectors Retail ETF (NYSEArca: RTH) holds all the big names, including a 12.8% tilt toward AMZN and 7.8% in WMT. RTH is up 4.1% year-to-date.
Additionally, investors may also find broader options, including the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), iShares US Consumer Services ETF (NYSEArca: IYC), Vanguard Consumer Discretionary ETF (NYSEArca: VCR) and Fidelity MSCI Consumer Discretionary Index (NYSEArca: FDIS). Year-to-date, XLY was up 4.6%, IYC rose 2.0%, VCR gained 2.9% and FDIS increased 2.9%.
The consumer discretionary ETFs also include slightly smaller tilts toward AMZN and RTH, but the broader sector ETFs also include exposure to other discretionary services, such as hotel restaurants, leisure industry, automobiles and media.
Consumer Discretionary Select Sector SPDR
For more information on the consumer sector, visit our consumer discretionary category.
Max Chen contributed to this article.