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Companies under the Consumer Staples sector sell relatively low-priced products that consumers use in their daily lives, like food, beverages and products for personal hygiene or household cleanliness. These stocks are considered defensive and are most trusted during periods of economic downturn.

An improving economy and rising consumer confidence have been driving the sector lately, although some investors seem skeptical about President Trump’s policies. North Korea’s latest nuclear test has further raised geopolitical tensions and increased pressure on the Trump administration. Other headwinds like potential price wars, a competitive environment and slowdown in international markets may also hinder growth.

We understand that the sector will remain immune to market bumps and a few disruptive trends will probably persist. These might influence investment decisions. However, it should be kept in mind that the consumer staples sector has the potential to face the headwinds.

Market Scenario

Consumer confidence – a key determinant of the economy’s health – increased considerably in August, after posting a moderate gain in July. In fact, August recorded the second highest reading since 2000. Encouraging manufacturing index, steady increase in housing prices as well as improving labor market owing to a gradual rise in wages also signal good health of the economy and indicate higher purchasing power. GDP growth also remains a driving factor.

Improving economy and a strong labor market is a key indicator of the U.S. economic health and a critical tool for the Federal Reserve in deciding on interest rate hikes. Keeping in view the favorable scenario, economists expect Fed to raise short-term interest rates in 2017, most likely in December. It would be the third rate hike of the year.

Moreover, economists expect continuing strength in consumer confidence and indicate that expenditure could rise in the third quarter, which makes it a good time to pick consumer staples stocks. It is quite likely that higher consumer spending will continue to be the economy’s primary engine of growth in the forthcoming quarters.

The encouraging data are well reflected in the three key U.S. indexes, which have closed in positive territory so far this year. The Dow Jones Industrial Average increased 10.5%, while The S&P 500 rose 10.2%. Nasdaq grew 11.4% in that time frame. The Zacks Consumer Staples sector, on the other hand, has registered an increase of 9.8% so far in the year.

Zacks Industry Rank – Positive

We put our X industries (all 265 of them) into two groups: the top half (i.e., top 132 Zacks Ranked industries with the best average Zacks Rank) and the bottom half (the bottom 133 Zacks Ranked industries with the worst average Zacks Rank).

Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. Click here to know more: About Zacks Industry Rank.

The broader Consumer Staples sector is currently placed in top 31% of the Zacks Classified sectors (5 out of 16). It is further sub-divided into the following industries at the expanded level (260 industry groups): Agricultural Operation, Beverages – Alcohol, Beverages – Soft Drinks, Consumer Products – Staples, Cosmetics, Food – Miscellaneous, Food – Meat Products, Food – Dairy Products, Food – Confectionary, Publishing – Newspapers, Publishing – Periodicals, Publishing – Books, Funeral Services, Soaps & Cleaning Materials, Textile – Apparel and Tobacco.

The majority of these are placed in the top half of the 260+ industry groups, with Food – Meat Products and Beverages – Alcohol both carrying a Zacks Industry Rank #9. It is followed by Publishing – Books, which carries a Zacks Industry Rank #24. Beverages – Soft Drinks and Soaps & Cleaning Materials hold a Zacks Industry Rank #35. Publishing – Newspapers also fall in this category with a Zacks Industry Rank #74. Cosmetics and Consumer Products – Staples, each holds a Zacks Industry Rank #89. It is followed by Publishing – Periodicals and Textile – Apparel, each with a Zacks Industry Rank #105.

The remaining few are placed in the bottom half of the group. While Tobacco holds a Zacks Industry Rank #169, Agricultural Operation carries a Zacks Industry Rank #180. Food – Miscellaneous and Funeral Services sub-sectors have a respective Zacks Industry Rank #184 and #191. Food – Confectionary and Food – Dairy Products hold a Zacks Industry Rank #234 and #248, respectively.

Looking at the position of these industries, one could say that the general outlook for the Consumer Staples space is positive. While increased competition and squeezed margins remain a major drag for these stocks, the companies in the sector are poised to benefit from cost-cutting initiatives and lower energy input costs.

Earnings Trends

The Q2 reporting cycle has almost come to an end with sectors like Energy, Basic Material and Auto showing weakness. On summarizing the performance of the 479 S&P 500 members that have come out their financial results as of Aug 25, we see that total earnings improved 11.2% on a year-over-year basis (74.3% of the companies beat EPS estimates) while total revenue increased 5.6% (68.4% beat top-line expectations), per our Earnings Trends report.

Almost 87% of the S&P 500 companies in the Consumer Staples sector have reported their results as of Aug 25, wherein 61.5% beat earnings estimates while 69.2% surpassed revenue estimates. While earnings rose 5.4% year over year, revenues increased 1.3%.

A few consumer staples stocks in the S&P 500 cohort like Tyson Foods, Inc. (TSN - Free Report) , Kellogg Co. (K - Free Report) , The Procter & Gamble Co. (PG - Free Report) beat the Zacks Consensus Estimate on both counts. Church & Dwight Company, Inc. (CHD - Free Report) , carrying a Zacks Rank #3 (Hold), posted better-than-expected earnings, but missed out on sales.

You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On the other hand, companies like Kimberly-Clark Company (KMB - Free Report) , The J. M. Smucker Company Inc. (SJM - Free Report) lagged earnings and revenue estimates.

Bottom Line

The current economic scenario is bolstering and the consumer staples sector is expected to grow on rising consumer spending and solid employment numbers. As a result, despite global headwinds, the sector seems attractive at the moment.

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