Morgan Stanley's Mike Wilson offers a stock-market playbook to cope with the cautious consumer

By Barbara Kollmeyer

Critical information for the U.S. trading day

A previous version of this report gave incorrect year-to-date returns for the iShares U.S. Consumer Discretionary, Vanguard Consumer Staples and the Consumer Staples Select Sector SPDR ETFs. The story has been corrected.

With a Fed meeting and major data out of the way, investors will have some time to ponder what's happening under the surface of the economy this week. That's as earnings season continues to roll on.

And any company dealing with the consumer is in for scrutiny, as one of the hottest themes on Wall Street right now that of the fed-up clientele, who appear no longer willing to pay up for a latte and or a burger for that matter.

Read: Stock-market bulls face test as consumers start to show signs of stress

Our call of the day from Morgan Stanley's chief U.S. equity strategist Mike Wilson, says with the economy giving off mixed signals, investors should start playing defense where the consumer is concerned, with advice on how to do that.

"Overall, we would describe the consumption backdrop as bifurcated between high-end stability and lower-end weakness...companies are increasingly focused on offering 'value' as the lower income cohort pulls back on spending and trades down," said Wilson.

Since the pandemic, companies have been trying to claw back rising costs, and mostly getting away with it, up to now. Warnings and comments from McDonald's (MCD), Starbucks (SBUX) and Amazon.com (AMZN)last week indicated the belt-tightening among Americans is well under way.

"We see consumer staples as a beneficiary of trade down from discretionary categories," said Wilson, noting that relative earnings revisions for consumer staples vs. consumer discretionary "have recently turned higher, pointing to upside in relative performance from here."

Consumer discrectionary companies include the above mentioned, plus others like Tesla (TSLA), Nike (NKE), Amazon (AMZN) and Netflix (NFLX). The iShares U.S. Consumer Discretionary exchange-traded fund IYC, is up 5.9% year to date.

Well-known consumer staples companies include Procter & Gamble (PG), Coca-Cola (KO), PepsiCo (PEP) and Walmart (WMT). The Vanguard Consumer Staples ETF VDC is up 5.9% so far this year, while the larger Consumer Staples Select Sector SPDR ETF XLP is up 5.4%.

Wilson adds that while plenty of consumer companies have yet to report, based on earnings seen so far and how stocks have performed - margin preservation and discipline on expenses seems to be most important for discretionary companies. "Top line stability" is more vital for staples companies, he says.

Of course don't expect consumer discretionary to take this lying down. Wilson noted that transcript mentions of "value" by those companies are historically elevated right now. The Wall Street Journal notes that some big-brand blue chips are already drumming up new ideas to lure back consumers. Elsewhere, former Starbucks CEO Howard Schultz suggests a "maniacal focus" on improving the customer experience.

Note Morgan Stanley's Wilson is among Wall Street's bearish forecasters, with a 4,500 end-year forecast for the S&P 500 SPX, though he recently said his team is going to spend less time on those predictions and more on stock selection. He called a 2022 market decline, but was too bearish for 2023.

The markets

Stocks DJIA SPX COMP are higher, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y mostly steady. Gold (GC00) and silver prices (SI00) are also up.

The buzz

Apple (AAPL) and Chevron shares (CVX) could be in focus after Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) reduced stakes in those big companies. Apple is still Berkshire's biggest holding, and Buffett said that would likely remain the case by year-end at the weekend shareholder meeting. He also completely cut a costly and losing stake in Paramount (PARAA). Check out MarketWatch's Live Blog recap.

Medical Properties Trust (MPW) is down 17% after tenant Steward Health Care filed for bankruptcy protection.

Luminar Technologies (LAZR) is off more than 9% after the maker of sensors for self-driving vehicles said 20% of jobs will go.

Robinhood Markets (HOOD) disclosed it's likely to get sued by the Securities and Exchange Commission.

Spirit Airlines shares (SAVE) is sliding after a wider-than-expected first-quarter loss.

Perficient (PRFT) stock is surging after Swedish private-equity firm EQT announced a $3 billion all-cash deal for the U.S. digital consultancy.

The data calendar is quiet this week, but there will be plenty of Fed speakers, kicking off with Richmond Fed President Tom Barkin and New York Fed President John Williams around 1 p.m.

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   NIO     Nio 
   AMC     AMC Entertainment 
   AMD     Advanced Micro Devices 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 

The chart

Elon Musk has suggested on his X platform that Buffett spend some of that growing $189 billion cash pile on Tesla shares (TSLA). Elon aside, some are worried about how Buffett might be predicting rough market times to come. Here's a chart from Gregory Crennan, chief economic strategist at Golden Coast Consultant:

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-Barbara Kollmeyer

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05-07-24 0138ET

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