Everyday Consumer Stocks Tumble After Strong Start to Year

Consumer staples stocks that surged earlier this year are now declining as investors worry about high prices and weakening profit outlooks. Companies like General Mills and Campbell's have cut their forecasts, while geopolitical tensions and inflation concerns add pressure to the sector.

Consumer staples stocks, which experienced a remarkable surge earlier this year, are now losing their appeal among investors who are growing concerned about elevated stock prices paired with weakening profit expectations, according to financial analysts.

These household name companies, typically viewed as secure investments during market uncertainty, attracted significant investor interest at the start of 2024 as money flowed away from expensive technology stocks. Concerns about massive artificial intelligence spending and potential business disruption drove this shift in investment strategy.

This dramatic movement pushed the forward price-to-earnings ratio for the S&P 500 consumer staples index to levels not seen since June 1999, according to LSEG data.

But warning signs emerged after the index reached an all-time peak in mid-February.

The sector has dropped 5.6% during March alone, as technology and energy stocks regained investor interest following the outbreak of Middle East tensions on February 28. Typically, investors seek shelter in defensive sectors during times of geopolitical turmoil, looking for consistent profits regardless of broader economic conditions.

“Rising inflation expectations tied to potential escalation with Iran could begin to undermine the defensive appeal of staples, particularly given how strongly the sector has already performed this year,” said Neil Wilson, investor strategist at Saxo.

Market experts worry that widespread inflation pressures, driven by the Iran conflict, might reduce consumer spending and damage sector earnings growth. Food manufacturers, which represent a significant portion of the staples index, already face challenges from shifting dietary preferences due to growing weight-loss drug usage.

Expected earnings growth for S&P 500 consumer staples companies in the first quarter has fallen to 1.9%, down from the 6.6% growth projected at year’s beginning, according to Tajinder Dhillon, head of earnings and equity research at LSEG.

By comparison, the broader S&P 500 index anticipates 12.8% earnings growth for the current quarter.

Even before U.S. and Israeli military action against Iran began, General Mills, maker of Cheerios cereal, reduced its annual core sales and profit projections, triggering widespread selling among food company stocks last month. More recently, Campbell’s Company lowered its outlook and halted share repurchase programs, pointing to sluggish demand for its snack products.

These companies rank among the poorest performing staples stocks this year, with Campbell’s shares hitting their lowest point since March 2003.

“We want to be selective in this environment, focused on earnings growth, as further multiple expansion (is) unlikely,” said Jake Johnston, deputy CIO of Advisors Asset Management.

However, the earlier shift toward defensive investments and strong quarterly performance from major retailers Costco Wholesale and Walmart have driven their stock prices to double-digit increases this year.

“A consequence of the rally is that the two largest stocks in the index are overvalued,” said Mark Preskett, senior portfolio manager at Morningstar Wealth.

Both Costco and Walmart shares trade at more than 40 times their projected earnings, representing the sector’s highest valuations.

“Walmart’s latest results were excellent. However, it is still overvalued in our eyes, and investors are clearly paying a lot for the perceived resilience of earnings,” Preskett said.

Despite recent losses, the sector maintains a 10% gain year-to-date, and some analysts don’t expect continued decline, particularly if AI concerns resurface.

“In this period now where we are living through so much AI-related uncertainty, including around its potential impact on which companies survive and broader employment, staples have a benefit in investors’ minds because they are not in AI’s path of destruction,” said Erika Maschmeyer, portfolio manager at Columbia Threadneedle.