Buy 4 Discretionary Stocks With Upside as Inflation Continues to Cool

May's CPI rose 0.1% sequentially, below the 0.2% estimate, while the core CPI also came in lower than expected at 0.1%, easing recession fears and boosting investor confidence due to hopes for Fed rate cuts and a U.S.-China trade deal. As a result, the article suggests investing in consumer discretionary stocks such as Carnival Corporation (CCL), Fox Corporation (FOX), Netflix (NFLX), and Interface (TILE), all of which have seen positive earnings estimate revisions over the past 60 days.

Analysis

Recent macroeconomic data indicates a favorable shift for U.S. markets, primarily driven by inflation cooling more rapidly than anticipated and an easing of U.S.-China trade tensions. May's Consumer Price Index (CPI) rose 0.1% sequentially, below the 0.2% consensus estimate, while the year-over-year CPI increased 2.4%, aligning with expectations; core CPI, excluding volatile food and energy, also undershot forecasts, rising 0.1% sequentially and 2.8% annually against expected 0.3% and 2.9% respectively. This moderation in price pressures, attributed partly to a 1% month-over-month drop in energy prices and declines in new and used vehicle prices (0.3% and 0.5% respectively), alongside a 0.3% month-over-month increase in average hourly earnings, has bolstered investor confidence and fueled expectations for Federal Reserve rate cuts, with market participants anticipating two 25 basis point reductions this year. The recently reached U.S.-China trade deal and paused tariffs further alleviate recession fears, creating a positive sentiment reflected by a general market sentiment score of 0.85. Consequently, the consumer discretionary sector is gaining traction. Specific companies such as Carnival Corporation (CCL), Fox Corporation (FOX), Netflix (NFLX), and Interface (TILE) exhibit strong fundamentals, underscored by positive earnings estimate revisions over the past 60 days and a per-ticker sentiment score of 0.75 for each. CCL's current-year earnings estimate improved 1.1% with an expected growth rate of 31.7%; FOX's estimate also rose 1.1% with expected growth of 32.4%; NFLX saw a 3.3% improvement in its earnings estimate with 27.7% expected growth; and TILE's estimate increased 2.6% with an expected 8.2% growth. All four companies currently hold a Zacks Rank #2 (Buy).

Key Decisions for Investors

• Given the improved macroeconomic outlook characterized by cooling inflation, easing trade tensions, and expectations of Fed rate cuts, investors should consider increasing allocation towards the consumer discretionary sector.
• Carnival Corporation (CCL), Fox Corporation (FOX), Netflix (NFLX), and Interface (TILE) warrant careful evaluation for potential investment, based on their strong expected earnings growth, recent positive revisions in earnings estimates, and favorable Zacks Rank #2 (Buy) ratings.
• Investors should continue to monitor key economic indicators, particularly inflation data and Federal Reserve policy statements, as these will be critical drivers for the broader market and consumer-sensitive equities moving forward.