Consumer Stocks Outperform After Earnings: The Case for Caution

- Advertisement -

Whirlpool’s December quarter sales were slightly below expectations, but its profits beat forecasts.


- Advertisement -

Consumer discretionary companies have been largely beating earnings estimates, and their shares have been rewarded. Whether the strength in stocks can continue is another question.

The average S&P 500 consumer discretionary company, a category that includes retailers, makers of household goods, restaurants, travel-related firms and others, added more than 3% to its stock after reporting fourth-quarter earnings, according to Evercore. Have seen less growth. Overall, shares of the sector reported earnings per share about 3.4% higher than the consensus call among analysts.

- Advertisement -

These are better outperformances than the S&P 500—and strong stock reactions. Shares of the broad market benchmark rose an average of 1% the day after the earnings report.

Whirlpool (ticker: WHR) is one example. The seller of washing machines and other appliances had sales of $4.9 billion in the December quarter, which fell short of estimates of $5.1 billion, but its EPS of $3.89 beat expectations of $3.34. The stock gained about 1.3% after the report.

- Advertisement -

A similar pattern played out in Tractor Supply (TSCO). December quarter sales were $4 billion, topping expectations of $3.9 billion, while EPS of $2.43 beat expectations of $2.35. The stock responded with a 6% gain following the report.

The wrinkle is that gains in stocks have been smaller in percentage terms than the amounts by which profits beat forecasts. This is partly because they were already very expensive in terms of earnings.

Invesco S&P 500 Equal Weight Consumer Discretionary Exchange-Traded Fund (RCD), which equally weights each stock in the sector and therefore removes the effect of Amazon.Com(AMZN) , which has a huge market capitalization, is up nearly 27% since shares began rallying in early October. The market sees an end to the Federal Reserve’s interest rate hikes, which are meant to reduce inflation by reducing demand for goods and services, so Wall Street sees a bottom in consumer spending.

The problem with that rally is that overall 2023 EPS expectations for the fund have fallen about 8% over the past three months, according to FactSet. With stocks rallying and earnings expectations low, these names are more expensive now. The fund is expected to fetch its constituents at around 25 times earnings per share over the next year, compared to around 20 times at the start of the rally.

Whether the good times can continue or not remains to be seen. But the stock is looking less attractive now than it was a few months back.

Write to Jacob Sonenshine at [email protected]

Credit: /

- Advertisement -

Recent Articles

Related Stories