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A Morgan Stanley analyst told investors in a note Wednesday that they are lowering estimates on discretionary exposed stocks as they expect significant pressure on household discretionary spending in the back half of 2022.
As a result, the analyst cut price targets on companies such as Home Depot (NYSE:HD) and Lowe’s Cos. (NYSE:LOW). Home Depot’s price target was moved from $365 to $350, while Lowe’s price target was lowered from $280 to $270.
“Inflation is running well above our expectations entering the year (hitting a 40-year high in June at 9.1%), and it’s outpacing disposable income growth,” said the analyst. “The result is a higher proportion of consumers’ incomes is being spent on necessities like food (which is seeing 10%+ inflation) and rent, while dollars are being pulled away from discretionary purchasing.”
According to Morgan Stanley’s proprietary model, the dynamic is not isolated to low-income consumers, though the analyst said they face the most pressure.
“High income households could spend less y/y on certain discretionary goods as well. This is important because total discretionary spending is heavily weighted toward high income households. The top/bottom 20% of households by income accounted for 43%/7% of total discretionary spending in 2019,” added the analyst. “Our new consumer discretionary spending forecast suggests steep deceleration (-8.5% y/y) in 2H’22, concentrated in durable goods.”
