The U.S. economy has been struggling for over a year, but the scenario seems to be changing steadily as inflation continues to show signs of easing. Inflation has declined over the past 12 months, which has now made the Fed sound a lot more confident about the economy having a softer landing than expected earlier.
At the same time, personal income and spending have been rising steadily over the past few months. Higher personal income is leading to increased spending, which is being driven by higher demand for goods and services. Given this scenario, it would be ideal to invest in discretionary stocks like Reynolds Consumer Products Inc. REYN, Norwegian Cruise Line Holdings Ltd. NCLH, Royal Caribbean Cruises Ltd. RCL and Live Nation Entertainment, Inc. LYV.
Purchasing Power Grows
The Commerce Department said on Jul 28 that personal income rose 0.3% in June on a month-over-month basis. Although growth was slightly lower than the economists’ expectations of a rise of 0.5%, personal income has been increasing steadily over the past few months.
Simultaneously, the Commerce Department said that personal spending grew 0.5% month over month in June.
The report came just two days after the Fed hiked interest rates by 25 basis points for the 11th time since March 2022 after leaving rates unchanged in June. This takes the federal funds rate to the range of 5.25% to 5.5%, its highest level in over 22 years.
The July interest rate hike was widely expected as the Fed had indicated that two more interest rate hikes would be required by the end of this year.
However, positive inflation data has raised hopes that the Fed could soon end its current monetary tightening cycle as it, too, now believes that the economy might have a softer landing.
Inflation has been steadily declining over the past year. The Commerce Department said that Personal Consumption Expenditures (PCE) inflation increased 2.6% in the second quarter, while core PCE inflation rose 3.8% over the same period. The figures are proof that inflation has been cooling after it increased 4.1% and 4.9%, respectively, in the first quarter.
The headline PCE inflation rose a modest 3% year over year in June, its lowest level since March 2021. Also, U.S. GDP increased 2.4% in the second quarter, signaling a slow but steady recovery.
Personal income and spending have been climbing as the labor market is resilient despite the Fed’s aggressive rate hike stance. Although the employment rate has somewhat slowed, the economy is witnessing solid job additions, which was 290,000 in June.
Higher consumer spending also saw retail grow 0.2% in June. Thus, companies in the consumer discretionary sector are expected to benefit as inflation cools further and personal income grows as it will boost spending. This is because consumers are likely to have more discretionary income, which can be allocated toward non-essential purchases.
Our Choices
Therefore, from an investment perspective, we have identified four stocks from the consumer discretionary sector that are likely to capitalize on reduced inflationary pressure. Each of these stocks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Reynolds Consumer Products Inc. is a consumer-branded and private-label products company. REYN produces and sells branded and store-brand products, which include cooking products, waste & storage products and tableware.
Reynolds Consumer Products’ expected earnings growth rate for the current year is 5.5%. The Zacks Consensus Estimate for the current-year earnings has improved 0.7% over the past 60 days. REYN currently carries a Zacks Rank #2.
Norwegian Cruise Line Holdings Ltd. is a leading cruise line operator. NCLH owns and operates three brands — Oceania Cruises, Regent Seven Seas Cruises and Norwegian Cruise Line.
Norwegian Cruise Line Holdings’ expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 5.1% over the past 60 days. NCLH presently has a Zacks Rank #2.
Royal Caribbean Cruises Ltd. owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. Additionally, RCL has 50% investment in a joint venture with TUI AG, which operates the brand TUI Cruises. Royal Caribbean Cruises primarily serves the contemporary, premium and deluxe segments of the cruise vacation industry, which also includes the budget and luxury segments.
Royal Caribbean Cruises’ expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 11.3% over the past 60 days. RCL currently has a Zacks Rank #2.
Live Nation Entertainment, Inc. operates as a live entertainment company. LYV operates through the Concerts, Ticketing, and Sponsorship and Advertising segments. Live Nation Entertainment has more than 580 million fans across all of its concerts and ticketing platforms in 46 countries.
Live Nation Entertainment’s expected earnings growth rate for the current year is 35.9%. The Zacks Consensus Estimate for current-year earnings has improved 123.1% over the past 60 days. LYV currently sports a Zacks Rank #1.
Royal Caribbean Cruises Ltd. (RCL): Free Stock Analysis Report
Live Nation Entertainment, Inc. (LYV): Free Stock Analysis Report
Norwegian Cruise Line Holdings Ltd. (NCLH): Free Stock Analysis Report
Reynolds Consumer Products Inc. (REYN): Free Stock Analysis Report
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