What would be the impact of Fed rate cuts on consumer earnings: Wells Fargo weighs in

As the Federal Reserve appears poised to start cutting interest rates later this year, Wells Fargo analysts examined the potential effects on consumer earnings in a note Wednesday.

According to the bank, floating rate debt exposure is back in focus, with significant implications for various consumer companies.

They note that market expectations indicate that while the Federal Reserve may hold rates steady at its July 31st meeting, a series of cuts could begin in September.

Given the current elevated rate levels, Wells Fargo sized the EPS sensitivity to each 100 basis points (bps) interest rate cut. The bank’s analysis considers the impact of lower interest expense on floating rate debt and the negative effect of reduced interest income.

Several consumer sectors are expected to benefit from the anticipated rate cuts. Wells Fargo highlights the following: BJ’s Wholesale Club (NYSE:), Grocery Outlet Holding Corp. (NASDAQ:), and US Foods (USFD) in the Food & Staples Retail sector; Bally’s (BALY), Caesars Entertainment (NASDAQ:), and Red Rock Resorts (NASDAQ:) in Gaming, Lodging, and Leisure; Home Depot (NYSE:), McDonald’s (NYSE:), and Restoration Hardware (RH (NYSE:)) in Hardlines & Restaurants; Hanesbrands (NYSE:), Victoria’s Secret (VSCO), and VF Corporation (NYSE:) in Softlines; Scotts Miracle-Gro (SMG) and Lamb Weston (LW) in Beverages, Food, and HPC; and Pool Corporation (NASDAQ:) in Building Products/Distributors, albeit with minimal benefit.

On the flip side, the bank says some companies could face headwinds from reduced interest income.

These include Costco (NASDAQ:), Five Below (NASDAQ:), and Ollie’s Bargain Outlet (OLLI) in the Food & Staples Retail sector; Las Vegas Sands (NYSE:) and MGM Resorts (NYSE:) in Gaming, Lodging, and Leisure; and Under Armour (UAA), G-III Apparel Group (NASDAQ:), and Gap (GPS) in Softlines.

For the Beverages, Food, and HPC sector, the impact is expected to be minimal, although about two-thirds of the names might see modest headwinds due to the loss of interest income.

Wells Fargo’s analysis suggests that while lower interest rates could provide relief to several consumer sectors, others might experience slight disadvantages, particularly from decreased interest income. Investors should watch closely as the Fed’s decisions unfold in the coming months.