The key to this earnings season is the consumer. The U.S. economy has held up over the past two years thanks to a strong consumer that has continued to spend even amid rising inflation and interest rates. Of course, the impact has not been even. The pressures facing lower-income consumers have been cushioned by strong spending from middle- and upper-income consumers. But recently, there have been signs of widespread weakness. More companies are reporting changes in spending habits as savings dwindle and the labor market softens. For example, just this week, PepsiCo beat expectations in its second-quarter adjusted earnings per share but narrowed its full-year revenue outlook due to weaker U.S. demand. The beverage and snack giant specifically pointed to changes in shopper behavior across all income groups. For investors, the consumer is at the top of the agenda this earnings season. Wall Street is on the move as traders try to forecast companies’ future revenue growth potential with many expecting a turbulent second half of 2024. “We need consumers to continue to participate collectively,” Bill Mertz, head of capital markets research at U.S. Bank Asset Management Group, said recently. “We need this to continue and remain constructive so that consumer spending, which accounts for 70% of GDP, can continue to flow and drive a stable economic environment.” “Shifting Priorities” Despite the consumer fissures, many investors expect the economy to have a soft landing. But that doesn’t mean all companies will thrive equally, and they expect investors will have to be more selective in where they invest in the second half of 2024. “Consumers are becoming very picky in their behavior. They’re picky about what they spend their money on. They’re picky about what they pay back,” Lindsay Rosner, managing director at Goldman Sachs Asset Management, said in a transcript of a media roundtable this week. “Consumers are spending money, but they’re being more selective about what they spend it on,” she added. Indeed, HSBC said this week that there are opportunities for investors who expect a “K-shaped” recovery, meaning that it will have disproportionate outcomes for higher- and lower-income households. Companies that could benefit from higher-income consumers include travel companies such as cruise line operator Viking Holdings Inc. and hotel chains Hilton Worldwide Holdings Inc. and Marriott International Inc., both of which HSBC said are luxury investments with “strong demand.” Meanwhile, companies with value propositions for lower-income consumers looking to price themselves out as they restructure their balance sheets are also winners in this theme. Big-box retailers Walmart Inc. and Target Inc. are buying opportunities, the firm said. Dave Sekera, Morningstar’s chief U.S. market strategist, said food giant Kraft Heinz Inc. and cereal maker KeraNova are two attractive buying opportunities that are undervalued. Kraft Heinz shares are down 13% this year, while KeraNova is up just 1%. “As more consumers prefer to eat at home instead of dining out, this could be a catalyst for higher valuations for these stocks,” he wrote. Sekera also cited travel as an area where spending is continuing even as consumers cut back on other purchases. “We’re certainly seeing a shift in people’s spending priorities,” he said. “Thoughtful and specific” To be sure, investors will continue to watch for signs of weakness, such as further insights into recent increases in delinquencies on credit card payments, autos, mortgages and more. But Goldman Sachs’ Rosner said consumers remain “smart” even amid mounting pressures. “They may not have perfect records, but they’re still very sensible,” he said. [on payments] “Banks are acting very carefully and concretely right now,” Rosner said on the record, “so we’re not seeing high delinquencies that would translate into losses from defaults. So overall, this is a soft landing.”
As cracks emerge, consumers are becoming ‘really picky’
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