By BRENDAN MCDERMID
NEW YORK – Expectations that spending on items ranging from hotels to clothing will continue to rise have helped make consumer discretionary stocks the most expensive sector in the S&P 500.
Now fund managers are looking for ways to profit without getting burned, if a pullback comes on the back of worries about the coronavirus and other factors.
The consumer discretionary sector now trades at a forward price to earnings ratio of 24.2, well ahead of the 23.7 forward valuation of the technology sector, according to Refinitiv data.
Higher prices for consumer discretionary stocks come at a time when the broad S&P 500 trades at a forward P/E of 18.9, its most expensive valuation since 2002, according to Bank of America Global Research.
High expectations will be tested in the coming week as companies ranging from Macy’s Inc. to Marriott International Inc. to Caesar’s Entertainment Corp. report fourth quarter earnings, giving investors a broad look at where consumers are choosing to spend their money and if there are any signs of a slowdown due to the coronavirus, now known as COVID-19.
Sellers on Amazon.com Inc., which constitutes about 26 percent of the sector, are already bracing for product shortages due to the spread of the virus among Chinese workers.
At the same time, consumer companies are among the most likely to be affected by rising U.S. wages. Goldman Sachs predicts wages will grow at a rate of 3.5 percent this year, putting additional margin pressure on companies that employ lower-wage workers. Average hourly earnings rose 3.1 percent in January compared with January 2019, according to the Bureau of Labor Statistics.
“We are now a consumer-focused economy and anything that affects the consumer will spread out to touch other sectors as well,” said Moustapha Mounah, a research associate at James Investment Research. “We are looking for companies that can grow their market share without sacrificing their margins due to wage pressures.” – Reuters
