The stock market is tanking but UBS says companies targeting high income spenders could surge as much as 50%. Here are 38 stocks that fit the bill.

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  • The S&P 500 has entered a bear market on the back of surging inflation and anticipated rate rises.
  • UBS analysts highlighted a pocket of the stock market that could benefit from inflation.
  • They explain why the subset of stocks could surge by 50% and highlight 38 names to watch.

The S&P 500 officially entered bear market on Monday, down 21% year-to-date and 4% on the day.

The recent decline comes as investors digest even more bad news for the everyday consumer, already grappling with significant inflation from rising energy costs to soaring food prices.

Friday brought the latest read of US inflation data which showed inflation reached a 41-year high of 8.6% in May, which was above economists’ expectations for the rate to flatline at 8.3%.

The surprise rise in inflation comes ahead of a Federal Reserve meeting on Wednesday where the central bank is set to raise interest rates. The market expected the central bank would raise rates by 50 basis points, but some economists and analysts are now predicting a 75 basis point raise.

Wharton professor Jeremy Siegel believes the Federal Reserve should hike rates by 100 basis points at the upcoming meeting.

The move to raise interest rates aims to slow down spending and stop inflation in its tracks. But the change in interest rates also impacts the valuation models for risk assets, like stocks.

On the back of the hikes, investors have been moving away from stocks and into safe-havens like the dollar and alternative assets like commodities, which can benefit from this inflationary environment.

The US dollar recently climbed to a 20-year high. Its highest level against a basket of major currencies since December 2002

“European investors are telling us they are selling down their (overweight) US bond and equity positions. But instead of repatriating the cash, they are hoarding it in dollars,” said George Saravelos, Deutsche Bank’s global head of foreign exchange research in a June 11 report.

“This is clearly evident in US capital flow data which show the foreign dollar cash pile is close to record peaks,” he added.

While it might seem as though there’s limited opportunities in stocks to capture this inflationary trend,  UBS is recommending investors look at one surprising area of the stock market for potential upside on the back of surging energy and food prices.

“The surge in energy and food prices points to considerable upside for consumer stocks exposed to higher income  versus lower income – with ~10% upside to pre-COVID levels and ~50% upside implied by the price of energy/agriculture,” said Keith Parker, a UBS equity strategist in the June 9 report.

A chart comparing higher and lower income consumer performance relative to energy and food prices from UBS report

Initial consumer spending was driven by the reopening theme but now the analysts see spending being driven by higher income households. They have seen a surge in savings while they also remain less susceptible to the rise in energy and food prices, and removal of fiscal stimulus.

“Lower income households are more susceptible to commodity inflation: food, energy and utilities account for nearly 20% of total consumption for lower income households vs 10-12% for higher income,” Parker said.

Chart of post COVID-19 savings from June 9 UBS report

UBS developed a quantitative screen to capture this theme highlighting stocks that have exposure to higher income consumers. The screening strategy focuses on industry neutrality to remove any tilts to specific sectors.

Here are the 38 stocks the screen selected as having exposure to higher income consumers.