iQoncept
The consumer discretionary sector’s post-COVID recovery has been slower than most other industries due to inflation and interest rate spikes, resulting in the underperformance of the Consumer Discretionary ETF (NYSEARCA:XLY) compared to the broader market (SP500).
The Consumer Discretionary Select Sector SPDR Fund ETF (XLY), which holds a 10% weightage on the S&P 500, has seen a rise of 24.6% in the past twelve months and experienced subdued growth in Q1 of 2.8% despite a 38% rally in 2023.
The heavy-weight sector, which includes services such as hotels, restaurants, leisure, travel, and other services, as well as products such as retail, apparel and luxury goods, household durables, automobiles, and automobile components, consists of some of the world’s largest corporations, including Amazon (AMZN), Tesla (TSLA), Starbucks (SBUX), and Home Depot (HD).
What Quantitative Measures Say
SA’s Quant gave the consumer discretionary sector an overall health score of 3.45 out of 5. Ratings under the Quant system are based on quantitative indicators like valuation, earnings growth, and past stock performance.
With first-quarter earnings around the corner, Quant marked 15 firms out of the 53 individual stocks as “buy” or higher, while 38 stocks were considered “neutral.” Furthermore, the sector scored 3.47 in terms of what the analysts think, with about 28 stocks as a “buy” or higher.
Leading the pack with the highest Quant Ratings are General Motors (GM), Royal Caribbean Cruises (RCL), and Ralph Lauren (RL), which got Quant scores of 4.94 and 4.83, along with respective ratings of “Strong Buy,” GM with an A+ on profitability, RCL with an A on growth and momentum, and RL with an A on momentum.
Meanwhile, giants like Amazon (AMZN), Tesla (TSLA), McDonald’s (MCD), Nike (NKE), Ford Motor (F), Best Buy (BBY), Starbucks (SBUX), and Home Depot (HD) had scores ranging between 3.49 and 2.97, and all were rated “hold” by the Quant system.
VF. Corp. (VFC) had the lowest Quant rating at 2.59 in the sector, along with a “sell” rating, earning an F on growth but a C+ on profitability and A- on valuation.
Outlook for 2024
Going ahead, Goldman Sachs said it expects strong 1Q EPS growth across most consumer subsectors; consumer discretionary is expected to rise 14%. Except for food, beverage, and tobacco, each consumer-facing subsector is expected to post revenue growth in 1Q.
In 2024, XLY may benefit from macroeconomic crosscurrents, as inflation is likely to reach the Fed’s 2% target. Stable interest rates could encourage consumer spending as real wages grow and US consumer sentiment improves since last year, leading to strong top-line and bottom-line growth for companies in the XLY fund as the consumer spending outlook continues to improve, Seeking Alpha analyst Uttam Dey said.
What Analysts Expect
Citi Research analysts have raised the consumer discretionary sector to overweight, with the automobiles and components subsector now at market weight. The report highlights recent fundamental concerns and low growth expectations for 2024, which reinforce recent underperformance.
The consumer discretionary sector (XLY) had the largest net selling and was among the worst-performing sectors last week, according to Goldman Sachs’ U.S. Equities Weekly Rundown report.
Morgan Stanley analysts noted that Consumer Discretionary distribution (XLY) and retail (XRT) measured the highest dispersion on a percentile basis at 85% relative to history. Dispersion measures the range of returns for a group, according to Morgan.
According to Goldman Sachs’ U.S. Weekly Kickstart report, investors are worried that recent statements from consumer-facing companies indicate some signs of weakness. Lululemon (LULU), Nike (NKE), and Ulta Beauty (ULTA) have all recently provided disappointing forward guidance. Last month, MCD’s CFO called out a “challenging consumer environment,” while this week DRI missed on revenues.
ETFs: (XLY), (VCR), (FDIS), (IYC), (FXD), (RXI), (RSPD), (PSCD), (SCC), (UCC).
