Is McDonald’s share price poised for a rebound?

McDonald's share price

McDonald's share price has retraced by more than 5% over the past month, as market participants were left shunning following lower-than-expected 1Q earnings due to reorganisation efforts and Middle East boycotts.

Pockets of optimism are that margins remain resilient (net margin at 31.3%), alongside healthy free cash flow, while price-to-earnings valuation are dragged to its lowest level since March 2020 (Covid-19 pandemic). One may also argue that the company’s entanglement with the Israel-Hamas conflict may not be long-lasting, given some intention from parties to wind down the war.

While McDonald's may be expected to have another tough quarter for 2Q 2024, broad consensus is that there is potential for McDonald’s revenue and earnings growth to recover to the mid single-digit levels over subsequent quarters.

Broader consumer discretionary sector relative to S&P 500 at a crucial level

The consumer discretionary sector has been the worst-performing sector over the past month, registering a 2.1% loss compared to the S&P 500’s 2.9% gain. Apart from a 5.7% loss in McDonald, sector heavyweights such as Amazon.com (-1.4%) and Tesla (-1.1%) were slightly underwater as well.

However, relative to the S&P 500, the sector is now at a crucial level, which has previously found some support back in October 2017 and December 2022, and may offer some resilience for the sector against the index if the line holds.

Technical analysis – Upward trendline support on watch for some defending

From the weekly chart, McDonald’s share price is now back at an upward trendline support in place since February 2021. The previous week has closed with the formation of a weekly bullish hammer, which suggests dip-buyers stepping in to defend the crucial support and that leaves one to watch for any price confirmation ahead.

Zooming out to its monthly chart revealed that its relative strength index (RSI) has never dipped below the 50 level since 2003, with the exception of March 2020 (Covid-19). Current level stand at 48, so that may offer an opportunity for market participants who are willing to bet on its longer-term upward trend.

A rebound from current levels may face a test of resistance at the US$272-US$275 range, followed by its all-time high at the key psychological US$300 level. Of course, should the weekly hammer be invalidated, that may suggest sellers in greater control and may call for an exit of the trade. But for now, the risk-reward proposition seems to be attractive.