BofA Securities U.S. quantitative strategist Savita Subramanian provided 10 reasons for a double upgrade for consumer discretionary stocks – from “underweight,” right past “equal weight” to “overweight” – and a simultaneous downgrade of defensive consumer staples companies. If correct, the call marks a significant shift in market leadership from companies with secular and predictable earnings growth to more economically sensitive stocks.
Reason three, the strategist believes that Federal Reserve is either done raising rates or close to it, and that stable borrowing costs will support consumption. Fourth, the consumer discretionary sector saw more revenue and earnings beats than the staples sector. The sixth and seventh reasons for the new overweight in discretionary stocks involves homebuilders and inflation-adjusted wage growth. Discretionary performance often follows homebuilder stocks with a lag and the latter are now up sharply from their October 2022 low. Real wage growth is now positive after two years in negative territory, also supporting spending.
Ms. Subramanian’s quantitative framework ranks all sectors by price and earnings momentum and also valuation. Discretionary stocks currently rank third while consumer staples are dead last. This result forms reason number nine to add discretionary stocks over staples.
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