[NEW YORK] The top-performing industry group of stocks' current bull market faces "significant risk" as investors look for inflation to accelerate, according to Dubravko Lakos-Bujas, JPMorgan Chase & Co's head of US equity strategy.
Lakos-Bujas was referring to consumer-discretionary shares: media companies, retailers, homebuilders, automakers and others reliant on household spending that's relatively easy to put off. He recommended in a report that investors cut their holdings to bring them into line with market benchmarks.
The chart below tracks the ratio of the Standard & Poor's 500 Consumer Discretionary Index to the S&P 500 since 1990. Since stocks began climbing in March 2009, the industry gauge has more than quintupled. That's the biggest gain among the 10 main groups in the S&P 500, which tripled in the period.
"We are becoming increasingly uneasy with the consensus rationale for the sector," Lakos-Bujas wrote in reducing his rating to neutral from overweight. While lower energy prices have benefited the category, their effect on earnings and revenue growth is poised to fade as oil markets stabilize, the New York-based strategist wrote. He cited wage inflation as another concern.
Analysts who follow consumer-discretionary companies are more optimistic. They see profit rising 12.5 per cent next year, up from 10.3 per cent this year, according to data compiled by Bloomberg for S&P's index. As for sales, they expect the pace of growth to accelerate to 5.9 per cent from 2.9 per cent.
Consumer-discretionary stocks also have "rich valuation," the report said. Their index was valued Thursday at 21.9 times earnings, the highest among the S&P 500 groups. The P/E rose from a low of 13.3 at the start of 2012.