So far, the stock market is having a great 2024, at least when measured by the performance of the major indexes. The S&P 500 and Nasdaq Composite are both up over 9.5% year to date. However, if you dig a little deeper, you see that there is a divergence forming.

Here’s why the S&P 500 could keep going up despite this challenge, and how these changing market dynamics could impact your portfolio.

A person sitting at a table looking at a computer in a concerned manner.

Image source: Getty Images.

Consumer-facing companies are vulnerable

There are plenty of ways to categorize companies. You could do it by sector. Or growth stocks versus value stocks. Or small cap versus large cap. But one often overlooked difference between companies is whether they mainly sell to consumers or businesses. For example, Nvidia and Apple (NASDAQ: AAPL) are both big tech stocks. But Nvidia predominantly sells to businesses, while Apple is more consumer-facing.

Some — though not all — consumer-facing companies are struggling, while business-facing companies are hitting record highs. The economy as a whole is doing well, but not as well if you look through the lens of the consumer.

The industrial sector has quietly hit an all-time high, led by surging profits from heavy equipment and special machinery manufactures like General Electric and Caterpillar. Meanwhile, a more consumer-facing company, United Parcel Service, which is one of the largest indusial companies by market cap, is hovering around a three-year low. The divergence within the industrial sector is an allegory for the broader market.

Justifying a premium price

Many companies rely on consumer discretionary spending and brand power to convince consumers to pay up for their products. Starbucks (NASDAQ: SBUX) is much more expensive than coffee and tea from a grocery store. Nike (NYSE: NKE) and Lululemon Athletica (NASDAQ: LULU) charge far more for their shoes and apparel than non-name-brand alternatives. Tesla (NASDAQ: TSLA) has brought the cost of its cars down, but there are still more affordable options. And Apple charges top dollar for its devices.

All five of these companies are instantly recognizable brands and industry leaders. But all five stocks have been struggling. Starbucks and Nike are within 5% of their 52-week lows. And all five companies have lost considerable value in 2024 compared to strong gains in the S&P 500 and Nasdaq Composite.

SBUX Chart

SBUX Chart

Despite being in different industries, the challenges of these companies are actually quite similar.

Demand problems

Nike has been cutting inventory so it is less exposed to slowing consumer demand. Lululemon delivered blowout results, but guidance was light due to a challenging consumer environment that includes concerns about the economy and diverting spending toward services and experiences over goods. Since reporting earnings on March 21, Nike stock is down over 8% and Lululemon is down over 19%.

Starbucks has exhibited impressive pricing power that has offset inflationary impacts and has led to record sales. But cost concerns remain, namely from higher wages and unionization efforts that could hurt its margins. Starbucks is doing well internationally, but a lot of its store growth over the next few years is centered on China, which has been facing a slowdown.

Apple and Tesla have been particularly vulnerable to the China slowdown. Apple’s growth has slowed in the U.S. and most of its emerging markets, but it’s still putting up record results. However, sales have fallen by double-digit percentages in China, which is Apple’s second-most-important market outside the U.S. And aside from economic woes, Apple is also facing steep competition from Huawei and others that are aiming to take market share from Apple in China.

Tesla has seen its margins collapse in the face of slowing demand and price cuts. It’s also facing heated competition in China, its second-largest market, from BYD and other competitors. Meanwhile, legacy automakers like Toyota are having success with hybrid vehicles over pure-play EVs — challenging Tesla’s business model. Earnings are projected to be lower in the next 12 months than the previous 12 months, signaling that Telsa is in store for negative growth over the short term.

A buying opportunity for patient investors

Different sectors tend to outperform or underperform the S&P 500 based on the business cycle, valuation, investor sentiment, and other factors. What makes 2024 unique is that many sectors are doing well, but there are major industry-leading companies that tell a completely different story.

The broader market can keep going up even if consumer-facing companies remain challenged, because businesses are doing well and could accelerate growth if interest rates fall later in the year.

In most cases, if an industry leader is underperforming it’s because it has high exposure to consumer spending and/or China. The investment thesis for Apple, Tesla, Nike, Lululemon, and Starbucks hasn’t really changed. Instead, all five stocks are underperforming because these companies don’t have the qualities that are driving the widespread rally (artificial intelligence and rising corporate profits from business-to-business sales).

Investors who think consumers and China will recover over time are getting the chance to buy many great companies on sale. Just be ready for more volatility, and the risk that the narrative could get worse before it gets better.

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Daniel Foelber has the following options: long May 2024 $90 calls on Starbucks. The Motley Fool has positions in and recommends Apple, BYD, Lululemon Athletica, Nike, Nvidia, Starbucks, and Tesla. The Motley Fool recommends United Parcel Service and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.

Are Nike, Lululemon, Apple, Tesla, and Starbucks Waving a Red Flag for the Stock Market? was originally published by The Motley Fool



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