02:07 PM EDT, 09/11/2024 (MT Newswires) -- Consumer staple stocks likely face "a more favorable" setup for outperformance amid expectations for the Federal Reserve to start easing its monetary policy soon, Oppenheimer said Wednesday.

Last month, Fed Chair Jerome Powell said the "time has come" to start cutting interest rates, though the timing and extent of policy easing will depend on incoming data. The central bank's Federal Open Market Committee increased its benchmark lending rate by 525 basis points from March 2022 through July 2023 in a bid to combat inflation, but has since held monetary policy steady.

"As we look at our consumer staples playbook, the recent change in the interest-rate backdrop coupled with valuations near trough levels create a more favorable setup for outperformance from here," Oppenheimer analysts Rupesh Parikh and Erica Eiler said in a note to clients.

The brokerage continues to see Church & Dwight ( CHD ) , Freshpet ( FRPT ) and Prestige Consumer Healthcare ( PBH ) as its top sector picks. The analysts said that e.l.f. Beauty (ELF), Hormel Foods ( HRL ) and Utz Brands ( UTZ ) "remain on our radar."

Past data suggest that consumer staple stocks have outperformed the broader market during periods of policy easing, with outperformance relative to the S&P 500 in four of the last five periods of rate cuts, Oppenheimer said.

The group has outperformed in six of the last seven periods of decreases in US Treasury yields, with "nearly every" beverage, food, and household and personal products company name in the brokerage's study outperforming on average, Parikh and Eiler said.

On Wednesday, government data showed consumer inflation in the US rose as expected last month sequentially, while the annual metric logged the smallest increase since February 2021.

The odds of a 25-basis-point interest-rate cut next week jumped to 87% Wednesday from 66% Tuesday, while the probability of a more aggressive 50-basis-point reduction fell to 13% from 34%, according to the CME FedWatch tool.

"Historically, the consumer staples group has generally outperformed in the six months following the initial fed funds rate cut, which suggests to us a favorable outlook for the group, assuming Fed fund rate decreases materialize," Parikh and Eiler wrote.

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