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Consumer spending will be solid again next year, boosting stocks in discretionary sectors as well as consumer staples, according to analysts at Goldman Sachs.
The firm expects discretionary cash flow for US consumers to pick up in 2025, growing 5.2% compared to a 4.4% rise in 2024, helped by more reasonable inflation levels and falling interest rates.
More robust cash flows will support a healthy discretionary spending backdrop and higher savings for US consumers, though disposable income will grow slightly slower than in 2024, down to 4.9% from 5.8%, though still robust given historical levels, the firm says.
"Aggregate household balance sheets remain robust, with net worth to DPI and household home equity as a share of GDP near all-time highs, which along with encouraging signs in consumer confidence should support a resilient spending backdrop despite supporting a modestly higher savings rate for 2025," the analysts said.
The analysts added that there are signs of improving consumer sentiment more generally. The firms' 2024 holiday survey found that lower-income consumers plan to spend more this year, while perceptions of prices and the importance of promotions moderated from last year.
Given the sustained healthy outlook for consumers, a few corners of the stock market are poised for strong gains, the analysts said.
The firm sees the most upside for discretionary stocks, adding that the sector will likely continue to outperform the more defensive consumer staples sector as bullishness continues to soar. However, consumer staples will also enjoy some tailwinds going into 2025.
"We saw a rotation away from Staples (given its defensive nature) to Discretionary over the last few months as the market's assessment of recession risk fell," the analysts said, adding, "We expect this to continue in 2025 as well."
The analysts said discretionary stocks are poised for growth amid easing interest rates and as their share of consumers' wallets normalizes, particularly among stocks like Target, Bath & Body Works, and DICK'S Sporting Goods.
They added that shares of consumer sector companies like Walmart, with healthy supply chain investments and long-term drivers like growth in alternative revenue streams, will continue to outperform. The retailer's stock is up around 78% in 2024.
Those names seeing greater competition and higher risks related to tariffs, though, will likely see a tougher environment in 2025, the bank said, pointing to companies including Autozone and RH (formerly Restoration Hardware).
The analysts said defensive sectors like consumer staples also have an improving setup as consumer sentiment rises. The sector saw inflows toward the end of the summer as recession fears spiked, but it has since seen losses amid stronger bullish sentiment.
"We see emerging tailwinds as volume/mix continues to improve amid a constructive consumer backdrop, and pricing could return as a top line lever for some given a reacceleration in input costs," they said.
They said they see continued momentum from market share gainers like Philip Morris and Monster Beverage Corporation. They warned, though, that companies with increasing competition from private labels and eroding returns on promotions—like Kraft Heinz, Hershey and Clorox—warrant more caution.
