Oppenheimer analysts see a more favorable setup for consumer staples stocks as the market anticipates a rate cut from the Federal Reserve.
“Fed easing has historically been positive for consumer staples stocks, and the group has generally outperformed during periods of low 10-year Treasury yields,” Oppenheimer wrote.
Their analysis shows that during past periods of Fed rate cuts, consumer staples stocks have outperformed the S&P 500 by an average of 32 percentage points.
The company says it also performed well in the six months following the initial rate cut, suggesting potential for outperformance if rate cuts materialize.
Analysts say consumer staples stocks have generally outperformed in previous periods of lower Treasury yields, with an average gain of 17.4% compared to the S&P 500’s gain of 5.4% over six periods.
However, over the recent period from October 2023 to September 2024, Oppenheimer notes that consumer staples underperformed, rising 17.1% compared to a 29.0% increase in the S&P 500.
The firm also notes that the relative price-to-earnings ratio for consumer staples stocks is slightly above recent bottoms, trading at 1.02x compared to the June 2024 bottom of 0.90x but below historical averages.
On an absolute basis, the group trades at 20.7 times earnings, which is above historical averages but below recent peaks.
The company remains the best choice in the sector. Church and Dwight (NYSE:), Freshpet (NASDAQ:), and Prestige Brands (PBH), while elf Beauty, Inc. (NYSE:), Hormel Foods (NYSE:), and Utz Brands (UTZ) are also on their radar.
“When we look at the consumer staples guide, the recent change in the interest rate backdrop coupled with near-bottom valuations creates a more favorable setup for outperformance from here,” Oppenheimer concludes.
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