The momentum of the stock market rally seems to be tapering off, partly due to a double impact from credit agencies. The recent U.S. credit downgrade by Fitch initiated a wave of selling pressure, followed by Moody’s (NYSE:MCO) credit rating downgrades that affected 10 U.S. banks this week.
These credit downgrades have swiftly dampened investor enthusiasm. Notably, rates on the 10-year Treasury note are on the rise again, partially attributed to these unexpected credit downgrades. Elevated rates pose a challenge for stocks, especially high-valuation technology stocks, which have shown remarkable performance this year. Figures such as U.S. Treasury Secretary and former Federal Reserve chair Janet Yellen and JPMorgan (NYSE:JPM) CEO Jamie Dimon have expressed their bewilderment about the Fitch downgrade. Yellen considers it “unwarranted,” while Dimon finds it “ridiculous” and of little consequence.
While it remains to be seen whether the recent 2% dip in the S&P 500 Index ($SPX) heralds the onset of a significant correction, considering the potential shift in investor sentiment, it’s prudent to closely examine consumer defensive giants like Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP).
Impact of Fitch and Moody’s Downgrades
Though the downgrades may not be as significant as the initial reaction indicated, a mild market correction appears overdue, given the inflated valuations of certain stocks, particularly in the technology sector. If not for the credit downgrades, some other headline catalyst would likely have reintroduced investors to the volatility they are familiar with.
The role of tech stocks in any forthcoming market downturn remains uncertain. Nonetheless, Coca-Cola and PepsiCo stocks appear appealing as safe havens, especially considering the upcoming less-favored month for the stock market, September, and the recent credit downgrades that are still fresh in the market participants’ minds.
Coca-Cola and PepsiCo: Consumer Defensive Stocks
Both Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) are esteemed consumer defensive stocks known for their quality. While they are rivals in the beverage industry, they differ substantially in their offerings. Notably, PepsiCo has a foothold in the snack food sector, while Coca-Cola primarily focuses on beverages.
Coca-Cola’s Path Forward: From Flat to Fizz
From Flat to Fizz Coca-Cola (NYSE:KO) is exploring expansion into various beverage segments, notably energy drinks, although success has been limited so far. Nevertheless, the company’s innovation in the beverage sector is commendable, as it seeks to extend its strong brand presence into promising growth-oriented product categories.
Coca-Cola (NYSE:KO) has exhibited resilience in a high-inflation environment, with Q2 revenues and adjusted earnings per share increasing by 11% and 17%, respectively. The management’s confidence in the second half is evident through the raised full-year guidance, projecting 8-9% top-line growth, up from the initial sales forecast.
Despite these positives, Coca-Cola’s stock performance has struggled to surpass its all-time high of around $65. Currently, the stock only holds a 1% premium over its pre-pandemic peak. Investors appear satisfied with Coca-Cola’s (NYSE:KO) consistent cash flows but are anticipating stronger growth. With continued beverage innovation, the stock has the potential for resurgence, presenting a compelling value proposition at a trailing price-to-earnings ratio of 26.8.
PepsiCo’s Solid Performance
PepsiCo (NASDAQ:PEP) has outperformed Coca-Cola since the onset of the pandemic, boasting a remarkable 38% increase from its pre-pandemic peak. Like Coca-Cola, PepsiCo has maintained resilience and increased prices without causing significant demand disruption. The company’s dedication to innovation and growth initiatives has been commendable.
PepsiCo’s (NASDAQ:PEP) snack business has garnered significant investor interest, leading some to accept a premium valuation. Currently trading at a trailing price-to-earnings ratio of 32.24, PepsiCo’s stock price has faced a downgrade from Morgan Stanley due to its high valuation. While industry figures like Jim Cramer view this move as unjustified, the valuation challenge poses a competitive consideration against Coca-Cola.
Final Verdict
Coca-Cola (NYSE:KO) takes the lead in this evaluation, Coca-Cola emerges as the favored choice, both as a beverage and as a stock. With a more affordable valuation, Coca-Cola’s potential breakout is notable as the company continues to invest strategically.
Featured Image: Unsplash @ Lucian Alexe
Author Faith Yakubu