Meanwhile, investors also might want to take a new look at the U.S. consumer discretionary sector. We have been cautious on this sector all year. Indeed, a combination of sluggish income growth, below-trend spending and high valuations has resulted in significant under-performance: The sector is down year-to-date versus a 6% gain for the S&P 500.
Market Realist – The consumer discretionary sector has been underperforming the S&P 500 this year, as you can see in the above graph. The year-to-date returns from the sector are only 1.6% compared to the 9.2% of the S&P 500.
Market Realist – The graph above shows the forward price-to-earnings multiples for the S&P 500 (SPY) by sector. Consumer staples (XLP) and consumer discretionary sectors (XLY) look like the most richly valued sectors, with PE multiples of 18x and 17.4x in comparison to 15.2x for the S&P 500 (IVV). The forward PE multiple for the consumer discretionary sector is higher currently than the five-year and ten-year averages. The rich valuations have contributed to the sector’s underperformance.
The sector has also been let down by the third quarter earnings of stalwarts like McDonald’s and Amazon. McDonald’s (MCD) posted adjusted earnings per share (or EPS) of $1.09, which marks a steep decline of 28% from last year. Revenues for the quarter fell 4.6% from the third quarter of last year, whereas overall global comparable sales declined by 3.3% in the U.S. Heightened competition, changing consumer tastes, and the China meat scandal have all contributed to the fall in sales.
Yum! Brands also disappointed, with 88 cents per share in earnings and $3.46 billion in revenues, both of which are lower than the consensus estimates of Thomson Reuters.
Read on to the next part of this series to see why the consumer discretionary sector could still present a good investment opportunity despite weak income growth.