Consumer sentiment data and American Express (AXP) - Get Report earnings both painted a bleak picture of the current state of the consumer. The market was well aware that would happen, but how much are investors putting aside right now?
Here’s where the consumer is, where consumer stocks are and what to expect going forward.
The consumer sentiment data out Friday was ugly, but better than expected. The reading was 71 for April, down from 89 in March. Investors knew this would be the case for an April month that fully encapsulates lockdowns, versus March, when lockdowns only started midway through the month.
Meanwhile, American Express reported revenue of $10.3 billion, flat year-over-year for a quarter that doesn’t come close to encapsulating the full extent of the lockdown. The company beat expectations on an adjusted basis. But Amex set aside $2.6 billion of cash for loan losses, as consumer credit falls off a cliff. That’s a 220% increase in in the loss provision year-over-year, which follows a theme set by large cap banks when they reported earnings. These credit loss provisions indicate that consumers won’t meet debt obligations in the near future, which is a very negative economic indicator.
But the market had priced this all in by March. As monetary and fiscal stimulus seems unlimited, as indications emerge that some states are reopening their economies and some Coronavirus vaccines make progress in testing phases, investors have looked past what will be a lost 2020 in terms of earnings and economic growth.
The S&P 500 has ripped 28% higher from its bear market low on March 23. Earnings estimates for 2020 have only fallen since then -- they’re down to $135 a share on the S&P 500 from $178 in January, on a bottoms-up basis. With the market expecting more than 20% earnings rebound in 2021, the average stock on the S&P 500 is trading at roughly 16.5 times 2021 earnings. That’s a normal multiple, historically, for the next 12 months, not 24. Meanwhile, lockdowns and vaccines are far from a sure bet in the near-term, and the economic fallout from the virus is currently an unknown.
And while sell-side earnings estimates call for $170 in EPS on the S&P 500 for 2021, a survey of fund managers by Lori Calvasina, RBC Capital Markets’ Head of U.S. Equity Strategy, shows the buy-side is looking for $158 in 2021. So the way the buy-side sees it, stocks are priced at 17 times 2021 earnings.
As for consumer discretionary stocks, that group has outperformed this year. The S&P 500 Consumer Discretionary Sector Index is down 7% year-to-date, compared with the S&P 500’s loss of 12%. And the consumer index is up 28% since March 23, in line with the S&P 500.
"Consumer Discretionary and Energy look most overvalued today on forward price-to-earnings,” Calvasina wrote in her note.
While some fund managers may be allocating towards consumer discretionary a fair bit, not all are.
David Miller, chief investment officer of Catalyst Capital Advisors is “completely steering clear” of consumer discretionary, he told TheStreet. Miller said he thinks some long-term investors like pension funds and individuals are buying broad market exposure, which lifts many sectors, cyclical or not, while some traders may also be riding momentum.
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