Consumer Discretionary in our Sector Beat

Similar to commentary we observed in our Big U.S. Banks Sector Beat, management teams continue to see consumer spending normalizing, but overall better than feared as some investors and corporate executives had been bracing for recession risk in early 2024. While a broad recession has not manifested to date and U.S. consumers are seen as more resilient than expected (i.e., they are spending more), their long-time health is a question mark (i.e., an increasing number are spending above their means). Further, evidence that the consumer is a tale of two [income] cities continues to mount.

Continuing, there remains bifurcation in consumer purchasing trends and outlooks. For example, consumer companies selling highly discretionary, larger-ticket items (e.g., boats, tractors, off-road vehicles) were less constructive on the Q4 environment and their outlooks compared with companies generating revenue from more routine consumer purchases, where people can more easily shift to value-conscious consumption (e.g., beauty supplies).

The Big So What™? According to our latest Inside The Buy-Side® Earnings Primer® published on January 11, at the start of earnings season, we saw the level of investor bullishness toward Consumer Discretionary companies bounce off the record low observed last quarter. Interestingly, this resulted in the sector holding the distinction as being the largest bull-sentiment gainer in Q4, while simultaneously registering second only to REITs as the sector with the most downbeat views overall (and with virtually no slippage of those taking the bearish case).

Moreover, 37% expected improving consumer confidence over the next six months, a stark contrast from just 8% in our Q3 survey. The net effect of these results demonstrates that more investors are finding reasons to become constructive on the consumer than they were last year as recession concerns fade to the background for now.

Key Themes from Our Analysis

• Macro — Executives Express Caution Amid “Mixed Signals” and Expectations for a Gradual Slowdown, Though Many are Optimistic the Environment Will Improve by the End of 2024
• Consumer Health — Spending Outlooks Differ Across the Sector, though Many Point to “Consistent” Consumer Demand Thus Far; “They are Still Coming in and They are Still Shopping… They are Just Very Frugal”
• Capital Allocation — Priorities Shift to Organic Investment with Openness towards Opportunistic M&A
• Margins — Pricing Power Ebbs as Companies Prioritize Cost Savings and “Educated” Pricing Strategies to Navigate Market Challenges and Enhance Long-term Competitiveness in 2024
• Labor — Companies Trade Off Larger Wage Costs for Lower Employee Turnover
• China — Many Point to Weakening Consumer Conditions, though Others Expect Traction in 2024; Further, with a U.S. Presidential Election Looming, Executives Weigh in on the Tariff Environment