Wells Fargo Weighs In by Investing

As the Federal Reserve prepares to potentially lower interest rates later this year, analysts at Wells Fargo have evaluated the likely impacts on consumer earnings in a report released on Wednesday.

The bank notes that exposure to floating rate debt is once again a significant consideration, which could have considerable implications for a variety of consumer companies.

Market expectations suggest that while the Federal Reserve may maintain current rates during its upcoming meeting on July 31, a series of rate cuts could commence in September.

In light of the current high interest rates, Wells Fargo has assessed the earnings per share (EPS) sensitivity for each 100 basis point reduction in rates. This analysis looks at the benefits of lower interest expenses on floating rate debt against the drawbacks of diminished interest income.

Several consumer sectors are likely to flourish thanks to the expected rate cuts. Wells Fargo points to particular companies that may see benefits, including BJ’s Wholesale Club, Grocery Outlet Holding Corp., and US Foods in the Food & Staples Retail category; Bally’s, Caesars Entertainment, and Red Rock Resorts in the Gaming, Lodging, and Leisure sectors; as well as Home Depot, McDonald’s, and Restoration Hardware in Hardlines & Restaurants. In Softlines, Hanesbrands, Victoria’s Secret, and VF Corporation are also highlighted, along with Scotts Miracle-Gro and Lamb Weston in Beverages, Food, and Home & Personal Care (HPC). Pool Corporation in Building Products/Distributors may experience minimal benefits.

Conversely, some companies might encounter challenges due to reduced interest income. This includes Costco, Five Below, and Ollie’s Bargain Outlet in the Food & Staples Retail sector; Las Vegas Sands and MGM Resorts in Gaming, Lodging, and Leisure; and Under Armour, G-III Apparel Group, and Gap in Softlines.

For the Beverages, Food, and HPC sector, any impact is expected to be minor, though roughly two-thirds of the companies could experience slight headwinds due to declining interest income.

Wells Fargo’s findings indicate that while lower interest rates may offer some relief to various consumer sectors, others could face minor drawbacks, especially from reduced interest earnings. Investors are advised to stay vigilant as the Federal Reserve’s decisions unfold in the upcoming months.