The consumer downturn behind tech stocks

Now consumption is one of the worst-performing sectors. Since entering June, signs of a cliff-like decline in consumption data have appeared everywhere.

A-shares hit new lows due to this, what about the US stocks? The situation is not much better. Behind the new highs of the Nasdaq and the Dow Jones, many food and beverage stocks have been hitting new lows recently. The performance of top companies is very poor, with outstanding performance from consumer companies standing out.

It seems that with AI in the picture, there is no need to eat anymore.

All companies continue to increase their investment in AI on the capital expenditure side, but at the same time, it also means insufficient investment in expansion in other areas, which ultimately translates into price increases across various industries. Coupled with layoffs after AI transformation, many people's incomes have declined. With one falling and one rising, it is natural for sales to decline and consumption to weaken.

Currently, most consumer stocks in the US market are already at odds with the market. It is rare for the consumer industry, which used to often hit new highs with the index, to perform like this. Is it time to bottom out?

I. Multiple categories of consumer-intensive thunderstorms?

First, let's look at the performance of various consumer companies this year. It is not difficult to find that many large food and beverage as well as catering companies are declining, such as McDonald's, Starbucks, Pepsi, AB InBev, and Mondelez. Recently, two leading American fast-food companies, Domino's Pizza and Chipotle Mexican Grill, have also experienced significant declines. The specific reasons are all underperformance.

Several global giants are inevitably affected by global business. Looking at specific financial reports, McDonald's first-quarter financial report shows that revenue growth has dropped from 10% to 4% year-on-year, with a sequential decline, and profit trends are the same. Demand outside the US is weak and below expectations, leading to a slowdown in revenue.

For these companies that have reached the pinnacle of globalization, it is difficult to achieve excess growth through opening up new markets or other means. Compared to AI stocks, these catering stocks also lack long-term growth expectations and stories to tell, and are completely priced based on financial reports. Under current interest rate conditions, when switching to low single-digit growth rates, they will naturally face a major valuation adjustment. McDonald's, which has always been a long bull, has deviated from the index and returned to a long-lost 20PE.

Since the beginning of this year, the trend of this global number one catering company has completely deviated from the market:

Starbucks' situation is even worse, with revenue turning negative in the latest quarter, and the Chinese market being swamped by low-priced coffee. Stock performance is also worse

However, these companies cannot be completely attributed to the decline in global business demand. The largest proportion of the US domestic business has also not kept up with the market's rise. For example, Starbucks' same-store sales in the US in the second quarter also declined by 3%, while globally all same-store sales declined by 4%. It is important to note that the US GDP is growing at 2%. The current state of restaurant consumption is not as prosperous as other industries in the US.

Stocks with excellent performance are facing the issue of being undervalued, especially when the market rises, they fall. For example, Domino's Pizza, although its performance growth rate did not meet expectations, its same-store sales in the US in Q2 increased by 4%, which is considered excellent in the restaurant industry. Additionally, profits also increased by 30%. However, the market magnifies the issue of insufficient revenue growth and forcefully undervalues the stock. The recent pullback has been more than 20%.

Chipotle Mexican Grill, which has received high praise, has even stronger performance. Despite the unfavorable environment, it is accelerating its growth. In Q2, revenue increased by 18%, profits increased by 33%, and same-store sales increased by 11%. Its cost-effective nature has accelerated its market penetration. However, it has always been priced at around 40 times its growth, so it has also experienced a decline. Since June, it has also fallen by 20%. This company is basically a leader in US stock restaurant growth, so such a decline is quite rare. With Q2 revenue and profits like this, can it fall like this in technology stocks with a 40 times PE ratio?

From this, it can be seen that the consumer industry is out of sync with the US stock market. When the index rises by 20%, but the consumer industry falls by 10%, a gap of 30% is immediately created.

Even if the performance is still good, valuation must be considered. In other words, consumer stocks with decent performance and not expensive long-term valuations can keep up with the US stock market. For example, among the major food and beverage stocks, Coca-Cola, which raised prices and improved revenue guidance for the second half of the year, has a low valuation and can still rise by 10% this year. However, PepsiCo, Mondelez, and Anheuser-Busch are not as lucky. PepsiCo, like Coca-Cola, is a beverage giant. Its second-quarter performance growth rate is not as good as Coca-Cola's, and its past aggressive price increases have led to less room for further price increases now. With lowered expectations and higher valuation than KO, its performance has also been slightly worse.

In addition, PepsiCo not only sells beverages but also snacks. Based on current consumer data, snacks have lower stickiness compared to beverages, so spending on snacks has been cut more severely. It can be said that compared to KO, PepsiCo's snack business is dragging its performance down.

Seeing that the pure snack company Mondelez has not yet announced its Q2 performance, but the Q1 growth rate has plummeted to 1.4%, with North American revenue declining by 2.1%, it is indeed challenging.

Overall, the performance of food and beverage stocks is worrying. It is normal not to eat out, but it is unexpected that even small snacks are not being consumed.

In terms of daily necessities, the performance of household fast-moving consumer goods is good, such as Procter & Gamble, Colgate, Unilever, and so on. Mainly due to low valuation, which has been consistently lower than food and beverage stocks. So far this year, both Procter & Gamble and Unilever have not experienced significant revenue declines, maintaining revenue growth of within 5% and profit growth of around 10%. Similar to the more outstanding companies in the food and beverage sector, this creates room for valuation recovery.

In terms of consumption control, one can control not going to restaurants, not eating snacks, brushing teeth, taking showers, as there is not much to save on these.

However, for Procter & Gamble and Unilever, the core products are daily necessities of household products. If it is non-essential cosmetics, then it becomes troublesome. Estée Lauder's performance is very poor, dropping by 30% again this year. High-end cosmetics naturally suffer from economic impacts. Even the stock price of mid-to-low-end L'Oréal has dropped.

In the clothing sector, large companies are not performing well. Nike recently stumbled, and now it is LVMH's turn. Luxury goods are basically only stabilized by Hermès, while the rest are struggling.

Global apparel consumption is not doing well. Representing the cost-effective route, Uniqlo is relatively better than them, but including exchange rates, the performance is not impressive, with almost zero revenue growth.

However, there is still a category of stocks in the U.S. consumer industry that is performing well, which is retailers: Walmart, Costco, all have good performances. Their performance is gradually improving each quarter, which is quite rare.

Considering the state of the restaurant industry, food is always necessary. If not eating out, then naturally one has to do it themselves. Pepsi also mentioned that their own branded snacks are not selling well because consumers are buying retailer-owned private label snacks.

This can also be understood. Grocery retail is a format that is close to high-frequency low-price consumption, and their performance does not conflict with that of restaurant stocks. Community retail stores like Dollar General should have performed well, but they were targeted by TEMU.

In conclusion, looking at the current performance of consumer stocks in the U.S., the higher-end ones are performing poorly, while those following the cost-effective route can achieve excess returns and maintain good performance. Additionally, the global consumer market is weak, with the U.S. slightly weak, Europe moderately weak, and Asia significantly weak. Good performance needs to be weighed against stock valuations, as the market is quite strict on consumer stocks.

Recently, there are many consumer stocks that are being singled out for valuation, with many star growth consumer stocks: CMG, CELH, DECK, which are representatives of high valuation and high growth. Starting from June, they have experienced significant declines, but there is also a general expectation of a significant slowdown in growth in the second half of the year So, the bottom-fishing logic for US consumer stocks now is to see if the market is mistakenly killing the growth stocks with low valuations. As for stocks whose prices collapse due to declining performance, the situation is quite complex. In the case of declining performance, the valuation is not stable but dynamically increasing. It's quite frustrating when stocks like Estée Lauder become more expensive as they fall.

II. Prosperity of US Stocks and Consumer Prosperity

Consumer stocks remain a major bright spot in the performance of US stocks, unlike sectors such as chips, the internet, and enterprise services (like SaaS), which show overall excess returns.

The consumer index is not one that can outperform many indices in the market, with many mediocre companies. However, it has produced many stock kings, with stocks multiplying by hundreds. In terms of long-term growth, companies like Monster Beverage and Domino's Pizza can compete with NVIDIA, while in recent years, stocks like ELF, CMG, and DECK have shown significant growth.

This is due to their excellent business models, where profits are all used to generate shareholder returns, leading to an amplification effect on stock prices. On the other hand, as US technology improves efficiency, it will eventually drive up ordinary people's incomes, which will then flow to the consumer end. The societal trend of encouraging forward consumption has also led to various excellent consumer stocks.

Behind the current prosperity of AI is the advantage of internet giants in business models (easy price increases, easy layoffs), which have generated performance increments and transferred them from corporate spending to hardware companies like chip companies in exchange for product upgrades from these internet giants. However, the profits of hardware companies have not been passed on to many local companies. Furthermore, the product upgrades by internet giants have not yet produced significant results in improving work efficiency or creating new job positions.

Therefore, the benefits of the bull market have not been transmitted to the US real economy, which is also a key factor in the poor performance of consumer stocks. Currently, the level of consumer loan delinquencies has reached a very high level, no wonder people are not even snacking anymore.

But looking at it from a different perspective, the internet companies with virtual service income are all showing growth in performance. If we consider them as a form of consumption, then the overall consumption level is not that bad. It can be understood as people reducing physical consumption and increasing virtual consumption.

This indicates that short-term mental enjoyment is valued more than material enjoyment. With consumer products remaining the same and tastes unchanged, compared to the ever-changing AI applications, they may not be as attractive. However, when consumers eventually realize that constantly pushing new AI applications is not that innovative, they may prefer to focus on living well, which will quickly narrow the gap between consumer and tech stocks.

III. Conclusion

Therefore, fundamentally, the current poor performance of consumer stocks is global, with too many consumer companies going bankrupt. The turning point lies in global income recovery and the balance between virtual and physical consumption. However, this does not prevent some consumer companies from making more money: those focusing on cost-effectiveness and virtual services. Therefore, at present, it can be said that it is a stage of price differentiation for different types of consumption The decline in some consumer stocks is not entirely due to poor performance. During this period, the stock prices of many consumer stocks that have not had any major issues have been squeezed by technology stocks, resulting in a situation where companies with similar growth rates are priced differently. Although these companies have balanced performance and valuation, it is difficult to determine whether the current situation is an overreaction or a normal valuation adjustment. However, relatively speaking, it is rare to see such low valuations in recent years. Similar to China, now is a critical moment to bottom fish in US consumer stocks. But don't forget, outstanding consumer stocks are only a minority, and there is no overall opportunity in the consumer industry