Wall Street Ignores Powell’s Rate Hike Warning: 5 Picks

On Aug 25, at the Jackson Hole Annual Policy Symposium of the Fed, Chairman Jerome Powell warned that the inflation rate is still highly elevated despite a steady progress in the past year. Consequently, the central bank is open for more hikes in the near future.

According to Powell, “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Justifying the fact for the Fed fund rate to move higher, Powell said, “The economy may not be cooling as expected. So far this year, GDP growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up.”

Surprisingly, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — advanced 0.7%, 0.7% and 0.9%, respectively, after Powell’s warning of more rate hikes. The small-cap benchmark, the Russell 2000, also gained 0.4%.

After Powell’s comments, market participants are directionless regarding the future trajectory of interest rate movement. The CME FedWatch is currently showing that the there exists an 80% probability that the Fed will keep the benchmark interest rate unchanged at 5.25-5.5%, while a 20% chance of rate hike by 25 basis points in the September FOMC meeting.

However, for the November FOMC meeting, a 44.5% probability is assigned for maintaining a status quo and a 55.5% probability is assigned for a rate hike of 25 basis points or more.

Whatever the situation, market participants have cheered the Fed Chairman’s acknowledgment that the fundamentals of the U.S. economy remain rock solid despite suffering from a double-edged sword — a 40-year high inflation rate and a more than 22-year high interest rate.

The Bureau of Economic Analysis reported that U.S. GDP grew 2.4% in second-quarter 2023 after rising 2% in the first quarter. The U.S. GDP increased 2.6% in fourth-quarter 2022. On Aug 24, the Atlanta Fed estimated the GDP growth rate to climb 5.9% in the third quarter. These data eliminate the concerns of a large section of economists and financial researchers that the economy may fall into a recession in the near future.

The major catalyst of U.S. economy is personal consumption expenditure (consumer spending), which accounts for nearly 70% of the GDP. Therefore, at this stage, it should be fruitful to invest in consumer-centric stocks to enrich one’s portfolio.

Our Top Picks

We have narrowed our search to five large-cap (market capital > $10 billion) consumer-centric stocks that have strong potential for the rest of 2023. These stocks have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Live Nation Entertainment Inc. LYV is benefiting from pent-up demand for live events, robust ticket sales and the sponsorship and advertising business. LYV remains optimistic about its growth prospects in 2023.

For concerts, LYV stated that it has already sold more than 90 million tickets (as of May 2023), up 20% from the 2022 levels. In terms of tickets, LYV is likely to benefit from the market pricing trend. Also, emphasis on new client and venue additions bode well.

Zacks Rank #1 Live Nation Entertainment has an expected revenue and earnings growth rate of 21% and 57.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days.

Royal Caribbean Cruises Ltd. RCL has been benefiting from strong close-in bookings at higher prices and continued strength of onboard spending driving load factors. Considering the strong demand environment for its vacation experiences, RCL increased its 2023 adjusted earnings per share guidance by 33% to $6.00-$6.20 from $4.40-$4.80 stated earlier.

Zacks Rank #1 Royal Caribbean Cruises has an expected revenue and earnings growth rate of 54.5% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 27.3% over the last 30 days.

DraftKings Inc. DKNG is a digital sports entertainment and gaming company catering to the competitive spirits of sports fans with products that include daily fantasy, regulated gaming, and digital media. DKNG is the only U.S.-based vertically integrated sports betting operator.

DKNG is a multi-channel provider of sports betting and gaming technologies, powering sports and gaming entertainment for 50 operators across more than 15 U.S. and global markets.

Zacks Rank #2 DraftKings has an expected revenue and earnings growth rate of 57.7% and 49.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11% over the last 30 days.

Marriott International Inc. MAR is benefiting from its focus on expansion initiatives, digital innovation, and loyalty program. MAR is also gaining from reopening international borders and leniency in travel restrictions, which have resulted in solid leisure demand along with business and cross-border travel improvements. MAR is consistently trying to expand its worldwide presence and capitalize on the demand for hotels in international markets.

Zacks Rank #2 Marriott International has an expected revenue and earnings growth rate of 15.2% and 29%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.1% over the last 30 days.

PepsiCo Inc. PEP reported robust second-quarter core EPS of $2.09, beating the Zacks Consensus Estimate of $1.95. Net revenues of $22,322 million improved 10.4% year over year and surpassed the Zacks Consensus Estimate of $21,609 million. Revenues benefited from a robust price/mix in the reported quarter.

PEP expects organic revenue growth of 10% for 2023 compared with the 8% rise estimated earlier. PEP expects core earnings per share of $7.47 for 2023 compared with the $7.27 forecast earlier.

Zacks Rank #2 PepsiCo has an expected revenue and earnings growth rate of 6.7% and 10.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
Marriott International, Inc. (MAR): Free Stock Analysis Report

Royal Caribbean Cruises Ltd. (RCL): Free Stock Analysis Report

PepsiCo, Inc. (PEP): Free Stock Analysis Report

Live Nation Entertainment, Inc. (LYV): Free Stock Analysis Report

DraftKings Inc. (DKNG): Free Stock Analysis Report

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