Despite concerns about still elevated inflation and fears regarding the possibility of a recession, consumers are proving resilient. That much is confirmed by cap-weighted gauges of consumer discretionary stocks outperforming the S&P 500 by wide margins this year.
However, those indexes are often highly concentrated, usually allocating more than 40% of their respective weights to just two stocks – Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA). Investors can limit single-stock risk and while gaining exposure to steady consumer spending trends via the Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RSPD).
The equal-weight ETF lacks big weights to the aforementioned duo of consumer discretionary darlings. In fact, none of RSPD’s 55 holdings exceed a weight of 2.39%, but that’s not hindering the ETF. RSPD is higher by 17% year-to-date and more upside could be on the way. Some analysts are growing bullish on consumer cyclical equities at large.
Things Looking Up for Consumer Stocks, RSPD
In what could fuel for the RSPD fire, strategists are getting constructive on consumer cyclical equities. In a report, Bank of America strategist Savita Subramanian upgraded the consumer discretionary sector to “overweight” from “underweight.” The defensive consumer staples sector was downgraded to “underweight” from “market weight.”
One reason for the upgrade – and one highly relevant to investors considering RSPD – is Bank of America’s improved view of the U.S. economy. The bank believes U.S. GDP could increase by 2% in the fourth quarter and grow 0.7% next year. The latter figure isn’t jaw-dropping, but it’s better than a recession.
“The revised forecast is based on further evidence of continued resilience in the U.S. economy, including positive GDP revisions, strength in business spending, and a rebound in labor supply. The recent headlines on depleted excess savings and student loan headwinds are believed to overstate the risks to consumer spending,” according to Seeking Alpha.
Another point in RSPD’s favor is earnings per share. In fact, consumer discretionary is the leading sector by that metric as measured by recent second-quarter earnings reports. Growth at Amazon Web Services (AWS) helped Amazon deliver solid second-quarter results, but there’s more to its second-quarter earnings story.
“Strong summer demand aided results for internet travel firms such as Booking (NASDAQ: BKNG) and Expedia (NASDAQ: EXPE) despite concerns over the health of the US consume,” noted Goldman Sachs strategist David Kostin.
Those two travel booking sites combine for about 4% of the RSPD portfolio.
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