Editor’s note: “The Resilient Consumer: A Key Investment Theme for the New Year” was previously published in December 2023. It has since been updated to include the most relevant information available.
Over the past few weeks, we’ve been doing everything we can to prepare our portfolios for success in 2024. Of course, as the old saying goes, proper preparation prevents poor performance.
And our analysis suggests that if the U.S. economy achieves a soft landing, allowing the Fed to cut interest rates, stocks should rally strongly in 2024.
And one of the sectors we’re most excited about for 2024 is consumer discretionary stocks.
This year, most counted the consumer out. Wall Street expected that hot inflation, high interest rates, depleted savings, and the resumption of student loan payments would crimp consumer spending.
But they didn’t.
Back in November, a Gallup survey showed that Americans would spend more on gifts in 2023 than in any holiday season since 1999. And that’s when consumers were going spend-crazy during the dot-com boom.
And new data from Adobe confirms just how strong this past holiday shopping season was. According to the analytics firm, “consumers spent $222.1 billion online from Nov. 1 to Dec. 31, up 4.9% year-over-year.”
Contrary to popular belief, the consumer remains surprisingly resilient. Moreover, consumer spending is actually quite vigorous right now.
And we suspect that it will only strengthen throughout 2024.
Behind the Bullish Outlook on a Resilient Consumer
The data continues to suggest that inflation will keep declining. And the Fed anticipates that if so, interest rates will come down. As a result, savings accounts should be bolstered as wage growth consistently outpaces inflation. Interest payments will drop.
And all that will help consumers to spend more this year.
Therefore, consumer discretionary stocks should benefit from improved sales and earnings growth trends over the next several years.
And current consensus estimates show this to be the case.
Since mid-2021, consumer discretionary stocks have seen their earnings growth trends deteriorate. In fact, since mid-2022, earnings growth in the consumer discretionary sector has been negative!
But that trend is expected to reverse course this quarter.
That is, the consumer discretionary sector’s earnings growth rate is believed to have hit a trough in Q3 of 2023. And it’s also expected to improve over the next several quarters. By mid-2024, earnings growth across consumer discretionary stocks will be running at 10% to 15%. And it’s likely to hold that level into 2025.
The major long-overdue earnings turnaround for consumer discretionary stocks is finally here.
That means these stocks should soar in 2024. And that’s especially true for those small-cap stocks because they are significantly undervalued right now.
Small-cap consumer discretionary stocks are trading at just 13.7X trailing earnings. That’s a near-30% discount to their 10-year average trailing earnings multiple of 19X.
It seems these stocks are on fire-sale ahead of a massive earnings turnaround!
That’s why we believe consumer discretionary stocks should benefit from both meaningful multiple expansion (~20% to 30%) and strong earnings growth (~10% to 15%) over the next year.
Altogether, the stage is set for these stocks to rise about 30% to 45% over the next year alone.
Not to mention, history also points to a strong showing from consumer discretionary stocks, too.
The Final Word
Mounting evidence indicates that the U.S. economy will achieve a soft landing in 2024. That means the Fed will be able to cut interest rates without the economy slipping into a recession.
Such soft-landing scenarios are rare. They have happened three times in the past 30 years – in 1994/95, 1998/99, and 2019.
Each time, stocks soared.
And each time, consumer discretionary stocks strongly outperformed.
We believe the data makes clear that consumer discretionary stocks will be some of the best-performing stocks in 2024.
And that’s why we just bought three stocks from that sector that could be some of the market’s biggest winners over the next year.
Learn their names, ticker symbols, and key business details.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
