Piper Sandler lays out a contrarian bet on the US consumer, and flags 13 stocks to play the trade

Piper Sandler suggests investing in consumer stocks as a contrarian bet on the direction of interest rates.
Elevated 10-year Treasury yields could weaken growth, lowering rates and boosting consumer stocks.
The bank shared a list of 13 stocks with Business Insider to play the trade.

All eyes are on the surge in AI stocks lately, but it might be a good time to make a contrarian bet on the consumer sector, Piper Sandler says.

That's because long-term interest rates could be set to decline in the near-term, Michael Kantrowitz, the bank's chief strategist, said in a note on Tuesday.

Yields on 10-year Treasurys have risen from 3.96% in February to 4.47% as of Wednesday afternoon. Eventually, high yields start to weigh on consumers and slow economic growth, which can pave the way for lower interest rates, the firm said. Falling rates then help stimulate consumer activity.

Despite a hot consumer inflation report on Tuesday, Kantrowitz said we could soon be approaching the point at which yields start to fall, which could catch investors off guard and boost unloved consumer stocks.

Cooling tensions in the Middle East and soft labor market data are among the factors that could drive 10-year rates lower, he said. Plus, expectations for consumer stocks are so low amid an inflationary backdrop, that any decline in rates could lead to upside in share prices.

"The real contrarian call here is to trim some AI profits and buy US consumer/housing stocks along with some exposure to international markets hit hardest over the past two months. Seems like a decent spot to dip your toe back into the water, at least for a rebalancing of exposure/risk," Kantrowitz wrote.

"Most are bullish on AI, few are bullish on the US consumer. Most, in this case, are right. We're in an industrial boom, led by investment rather than the consumer," he continued. "However, happiness = outcome — expectations…maybe there is some room for consumer stocks to see some happiness over the next few months?"

Kantrowitz shared a list of 13 consumer-facing stocks to play the trade. All 13 are in the top 20% of stocks in terms of sensitivity to 10-year yields, as well as the top 20% most volatile stocks relative to the market. In Kantrowitz's view, if interest rates were to drop, they're likely to be the stocks to jump the most.

Here's the full list.

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