Must Read Research

September 18, 2022

Candace Browning, Head of BofA Global Research

The Beast and Beauty. In the same week, we note investors are max bearish, growth indicators depict a beastly outlook and online retail overseas looks ugly . . . at least we see hope in beauty stocks.

 

With both U.S. yields and the unemployment rate headed to 4-5%, poor sentiment isn’t enough to keep the S&P from making new lows for the year, according to BofA Global Research Chief Investment Strategist Michael Hartnett. Earnings cuts will be the catalyst for the further selloff and Michael suggests nibbling at S&P 3600 and gorging at 3000. Head of BofA Global Research Investment Committee Jared Woodard and team share this cautious stance, waiting for active investors to panic, quant signals to turn, profit forecasts to trough or valuations to reset before getting more constructive. Labor is 40% of S&P 500 expenses, workers have bargaining power and Jared doubts that future wage hikes are “priced in.”  Investors have put $4.2T into equities over the last 2 years and new data show only modest Q2 selling.  

 

The Fed’s overarching focus on price stability raises the risk of policy error, especially as inflation surprises have trended down. An earnings shock is likely coming, indeed past economic recessions have always resulted in earnings contractions, an average of -24%. Still, consensus global growth expectations in the next 12 months are +7%. Lead indicators suggest a cool off to -1% and while all U.S. sectors but energy have seen cuts this quarter, we could be in for a lot more pain in case of recession.

 

Warm, dry weather in Europe this summer may have been good news for gelateria sales but not for European apparel retailers as it keeps customers buying off-price, low average selling price (ASP) spring/summer products rather than high-priced, undiscounted fall/winter products. Temperatures in London, Paris and Berlin have averaged 16% hotter this quarter than a year ago with days of rain less than half last year’s level. Warm weather back in 3Q 2018 brought a wave of profit warnings. The European energy crisis we’ve extensively written about compounds and lengthens the issue for retailers, and even after accounting for new price caps, the average UK household bill in 2023 is expected to rise 82% above 2020 levels, equivalent to 130% of the annual budget for clothing and footwear. German consumers will see a 200% increase in their bills. European Luxury Goods analyst Geoffroy de Mendez remains cautious on European online retail, inventories are elevated and his EBITDA (earnings before interest taxes depreciation and amortization) numbers are 15% below consensus.

 

Beauty has emerged as a winning category post pandemic, with consumers spending on “affordable luxuries” and having more usage occasions. The backdrop for the larger personal care companies is less compelling as they emerge from the pandemic facing difficult sales comps, significant cost inflation and consumer trade-down. Total Home and Personal Care (HPC) sales have decelerated over the last 4 weeks, rising just 0.8% and the sales growth gap to private label has widened.  

 

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