Morgan Stanley's Wilson Sees Risks Rising for Consumer Stocks

Consumer stocks, one of the brightest corners of the market this year, are about to lose their shine as risks build for the sector, according to Morgan Stanley’s Michael Wilson.

The faltering rally is in keeping with the view of Morgan Stanley economists that household spending probably can’t sustain the surprisingly strength of the first three quarters, the strategist said.

Assigning an equal weighting to members of the consumer discretionary sector shows performance is breaking down, while 44% of stocks trading below their 200-day moving average also points to weakness, Wilson wrote in a note.

“This price action is picking up on slowing consumer spend, student loan payments resuming, rising delinquencies in certain household cohorts, higher gas prices and weakening data in the housing sector,” he said.

U.S. consumer discretionary stocks, a group that includes Amazon.com Inc. and Tesla Inc., have gained 26% this year, double the 13% advance in the S&P 500.

That outperformance hit a wall last week, when the sector tumbled more than 6% in rough trading for risk assets as the Federal Reserve signaled interest rates will be higher for longer in the fight against inflation.

Wilson is not alone in souring on the sector. Goldman Sachs Group Inc. analysis shows that on an equal-weight basis, the consumer discretionary sector will underperform the S&P 500 by seven percentage points over the next 12 months.