5 Consumer Discretionary Stocks to Gain as Inflation Cools, Rates Cut

Zacks

2024-10-01

The Wall Street rally is back, with the Dow and the S&P 500 hitting fresh highs last week. Positive economic data coupled with the Federal Reserve’s recently announced rate cut is giving a boost to consumer sentiment. On Friday, fresh economic data showed that inflation continued its decline in August.

Also, personal income and consumer spending have been steadily increasing. The Federal Reserve’s rate cut is going to ease price pressures further and allow consumers to spend freely ahead of the holiday season.

Given the upbeat sentiment, investing in consumer discretionary stocks would be a wise decision. Five such stocks are American Outdoor Brands, Inc. AOUT, Cinemark Holdings, Inc. CNK, Crocs, Inc. CROX, Royal Caribbean Cruises Ltd. RCL and Spectrum Brands Holdings, Inc. SPB. These stocks have seen positive earnings estimate revisions in the past 60 days. Each of the stocks has a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PCE Inflation Decreases, Lifting Indexes

The Commerce Department reported on Friday that the personal consumption expenditure (PCE) index increased a meager 0.1% in August after a 0.2% rise in the prior month. Year over year, the PCE index rose 2.2% month over month in August after increasing 2.5% in July.

Core PCE, which excludes the volatile food and energy prices, increased 0.1% sequentially in August after rising 0.2% in the prior month. Year over year, core PCE rose 2.7% in August after advancing 2.6% in July.

Also, consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% in August. Personal income rose 0.2% in August, while wages and salaries increased 0.5% sequentially in August.

Wall Street is on a high. Positive economic data has been fueling the rally. On Friday, the Dow ended at a new record high of 42,313.00.

Rate Cut, Holiday Season to Boost Discretionary Stocks

Earlier this month, the Federal Reserve cut interest rates by 50 basis points for the first time since March 2020. The encouraging economic data has raised hopes that the Fed could cut interest by another 50 basis points in total by the end of this year.

The benchmark policy rate currently ranges between 4.75% and 5%, the lowest since April 2023. Also, the Fed's latest dot-plot suggests that the Fed funds rate will fall to 4.25-4.5% by the end of the year, with a projected one percentage point decrease in 2025 and a further half-point reduction in 2026. This would result in a final rate range of 2.75-3%.

Consumer discretionary stocks appear to benefit from the positive environment. This is because consumer discretionary stocks are considered growth assets, which are inversely related to market interest rates. Growth investors focus on stocks that show strong earnings or revenue growth, expecting these to lead to future stock price gains. A reduction in interest rates benefits companies by lowering production costs and providing access to cheaper credit.

Consumer Discretionary Stocks With Growth Potential

American Outdoor Brands

American Outdoor Brands, Inc. is a provider of outdoor products and accessories, including hunting, fishing, camping, shooting and personal security and defense products, for rugged outdoor enthusiasts. AOUT produces products under the brands Caldwell, Crimson Trace, Wheeler, Tipton, Frankford Arsenal, Lockdown, BOG, Hooyman, Smith & Wesson Accessories, M&P Accessories, Thompson/Center Arms Accessories, Performance Center Accessories, Schrade, Old Timer, Uncle Henry, Imperial, BUBBA, UST, LaserLyte, and MEAT!.

American Outdoor Brands’ expected earnings growth rate for the current year is 59.4%. The Zacks Consensus Estimate for current-year earnings has improved 4.1% over the past 60 days. AOUT currently sports a Zacks Rank #1.