In recent analyses, Oppenheimer has pointed out that consumer staple stocks are likely to experience a favorable environment for outperformance, especially in light of the Federal Reserve's anticipated monetary policy easing. The comments came after Fed Chair Jerome Powell indicated last month that the 'time has come' for interest rate cuts, depending on upcoming economic data.
Since March 2022, the central bank has increased its benchmark lending rate by a substantial 525 basis points through July 2023 to combat inflation, but the recent hold in monetary policy suggests a shift may soon be on the horizon. Oppenheimer's analysts, Rupesh Parikh and Erica Eiler, emphasized that the recent changes in interest rates, combined with consumer staples valuations nearing historical trough levels, create a robust landscape for potential outperformance.
'As we look at our consumer staples playbook, the recent change in the interest-rate backdrop coupled with valuations near trough levels create a more favorable setup for outperformance from here,' they noted in a client update. Among the top picks highlighted by the brokerage are Church & Dwight (NYSE: CHD), Freshpet (NASDAQ: FRPT), and Prestige Consumer Healthcare (NYSE: PBH).
The analysts also remarked that e.l.f. Beauty (NYSE: ELF), Hormel Foods (NYSE: HRL), and Utz Brands (NYSE: UTZ) are on their radar as potential beneficiaries in this landscape. Historical data supports the argument for consumer staples, suggesting that these stocks have generally outperformed the broader market during periods characterized by policy easing.
Specifically, outperformance relative to the S&P 500 was noted in four out of the last five instances of interest rate cuts. Furthermore, the sector has exceeded expectations in six of the last seven periods where US Treasury yields fell. Recent reports showed that consumer inflation in the US rose as anticipated, while the year-over-year measure recorded its smallest increment since February 2021.
This aligns with the heightened expectations surrounding a potential interest rate cut from the Federal Reserve, with the CME FedWatch tool indicating an increased probability of a 25-basis-point cut rising to 87% this week, up from 66% the previous day. Parikh and Eiler also noted that historically, consumer staples have generally performed well in the six months after a Fed funds rate cut.
'This suggests to us a favorable outlook for the group, assuming Fed fund rate decreases materialize,' they concluded. Market activity surrounding this sector should be closely monitored as external economic conditions evolve, providing investors with potential opportunities within consumer staples during this transitional period in monetary policy..