Best consumer stocks to buy outside of AI

We’ve been beating the table on AI stocks for a long time, and we’re still putting the table on them today. But they’re not the only good stocks to buy in the market right now.

We’re also big fans of consumer stocks right now.

Today, Nordstrom (JWN), Abercrombie & Fitch (ANF), Foot Locker (FL), and chew (CHWY) all reported positive sales growth and positive comparables
sales. Clearly, consumers are still spending. As such, the bull thesis on consumer stocks is quite simple.

But while the stock market has rallied since late 2022 on artificial intelligence euphoria, even the best consumer stocks have lagged significantly.

The ETF Global X Artificial Intelligence & Technology (AIQ) has practically doubled its lows since late 2022 and reached all-time highs. Meanwhile, the SPDR S&P Retail ETF (XRT) is up less than 40% from its late 2022 lows and remains 25% from all-time lows.

Why? Interest rates.

Although stocks have risen since the end of 2022, so have interest rates. This new bull market began in October 2022. At that time, the Fed Funds rate was 3%. Over the next nine months, the Fed raised rates nine times to bring the Fed Funds rate to 5.25%.

This sharp rise in interest rates reduced consumer stocks.

Car finance rates have increased…

Big ticket financing rates have increased…

Credit card interest costs have risen…

Meanwhile, money has become more expensive and consumer spending has become more selective.

But everything is about to change.

Powell to the rescue

Fed Chairman Jerome Powell signaled last week that interest rate cuts — not rate hikes — are coming.

The market expects the Fed to cut interest rates in September for the first time this cycle, and then to cut interest rates again in November…and again in December…and again in January, March, May and June next year.

In total, the market expects the Fed to cut rates eight times by next summer.

That means lower mortgage rates…

Lower car finance rates…

Lower debt financing rates…

Lower credit card rates…

And that, of course, means more consumer spending.

Most of the traders mentioned above who reported positive earnings trends also noted that inflationary pressures continue to ease. This is consistent with the weak price survey data we have seen in recent weeks and the decline in oil prices.

So… we get resilient economic activity… and easing inflationary pressures… ahead of what will likely be more rate cuts in the final months of 2024.

This is a recipe for a broad strengthening of the economy.

The last word on consumer stocks

Consumer spending has slowed significantly over the past couple of years and especially here in 2024 as higher rates start to bite consumers. For all of 2022, retail sales growth was north of 5%. In 2023, retail sales growth has slowed to around 3.6%. In 2024, average retail sales growth so far has been around 2.5%.

For two consecutive years, the consumer has slowed down.

That will change in the next two years. Lower rates will help reawaken the consumer and unlock accelerated retail growth. We see retail sales growing over 3% next year and possibly over 4% the year after.

As consumer spending reaccelerates in 2025/26, consumer stocks should benefit from strong earnings growth. Earnings per share throughout S&P 500 Consumer Discretionary The sector is expected to grow by 12% in 2025 and 14% in 2024, for growth of nearly 30% over the next two years.

At the same time, consumer stocks look cheap right now. The S&P 500 Consumer Discretionary sector’s average earnings multiple is currently 26X, compared to a five-year average earnings multiple of 33X. In a friendlier rate environment, we could see consumer stocks trade at an average earnings multiple of 33X, implying the potential for multiple expansion of ~25% over the next couple of years.

Combining 30% profit growth and 25% multiple expansion, consumer inventories could realistically increase by more than 50% over the next two years.

The best consumer stocks could rise more than that.

And that’s why we’re extremely bullish on consumer stocks right now.

Click here to check out some of the top consumer stocks on our radar right now.

_{As of the date of publication, Luke Lango did not hold (either directly or indirectly) any position in the securities mentioned in this article.}

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