(Bloomberg) -- As the Federal Reserve nears the end of its most aggressive tightening campaign in decades, a softening US dollar would bode well for one particular cohort of beaten-down stocks: consumer staples.
These so-called safety shares, known for their strong dividend yields and steady business, fell out of favor this year and are trailing well behind those of riskier technology and discretionary companies as higher borrowing costs have reduced their appeal as dividend plays.
More pain for the group came Wednesday when Campbell Soup Co. tumbled almost 9% — its biggest loss since May 2018 — after the packaged-food maker left its annual forecasts unchanged. That sent shares of peers including General Mills Inc., Kellogg Co. and Kraft Heinz Co. lower.
But with speculation rising that the US central bank plans to potentially pause its tightening campaign at its meeting next week, traders are wagering that the dollar, which has declined over 8% from a peak in September, could further lose steam after higher rates helped drive a surge in the greenback in 2022.
A pullback in the dollar should, in turn, help companies that sell goods overseas and have been vulnerable to the ramifications of a stronger dollar. More than a third of companies in the S&P 500 Index derive a portion of their revenue outside the US, with staples firms generating about a quarter of their sales overseas, per RBC Capital Markets.
Although that pales in comparison to the tech sector, which generates more than half of its sales outside of the US, a potential drag on the dollar is still poised to support staples companies in the second half of 2023, according to Arun Sundaram, vice president of equity research at CFRA.
“If the dollar holds where it is or continues to depreciate, the companies that should see the largest benefit are going to be companies like Mondelez International, Colgate-Palmolive, Coca-Cola, Procter & Gamble and Kimberly Clark,” Sundaram said in a phone interview.
Although Americans were still willing to pay more for diapers, soda and other everyday necessities at the start of the year, Campbell Soup signaled on Wednesday that shoppers are becoming less willing to put up with price increases on beverages and snacks in response to inflation. Meanwhile, General Mills flagged at a consumer conference the same day that raising the cost of its products would likely become more difficult as inflation cools.
That’s raised concerns that packaged-food companies may face slowing sales growth, as the benefit of higher prices fades. At the same time, a declining dollar makes import costs more expensive, which could offset some of the benefit of a softer greenback.
Still, there are early signs of light at the end of the tunnel: Wall Street analysts are getting bullish on household-products companies as price pressures moderate, lifting their year-ahead profit forecasts for 80% of companies over the past month, according to Bloomberg Intelligence.
Beverages and food products are tied for second, with staples distribution and retail in last place, which recently added Target Corp., Dollar Tree Inc. and Dollar General Corp. — three companies that had previously been housed in the discretionary sector.
The distribution and retail industry, which also includes retail giants like Walmart Inc. and Costco Wholesale Corp., is ranked at the bottom of BI’s staples industry scorecard due to challenging price momentum for their stocks and weak earnings-revision breadth.
So, if the dollar’s strength has indeed run its course, staples companies in the S&P 500 — not just tech firms — that derive a portion of their sales from overseas will likely stand to benefit, according to Quincy Krosby, chief global strategist at LPL Financial.
“Remember when the dollar was at its full strength, all we would hear during the earnings season was how it was hindering their ability to do well,” said Krosby. “Now, we’re on the road towards the other extreme with the dollar easing.”
--With assistance from Jessica Menton, Janet Freund and Katrina Lewis.
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