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 First-quarter earnings are winding down and the consumer
discretionary components of the S&P 500 are the only sector showing
double-digit earnings growth from a year ago. Earnings for the S&P
as a whole are expected to have fallen 5.1 percent in the first
quarter.
Following year-end holidays, the first quarter is not typically a
good one for consumer spending. This year especially, given it
started with a stock selloff, analysts did not expect consumers to
be out spending.
"The whole sector had low expectations coming into earnings and for
good reasons," said Kim Forrest, senior equity research analyst at
Fort Pitt Capital Group in Pittsburgh.
"The stock market was stinking up the place and analysts assumed
consumers were too," Forrest said, adding that strong earnings "will
remind the market that two-thirds of the U.S. economy is the
consumer."
About 30 percent of the sector's components on the S&P 500 have not
reported earnings while 87 percent of the index's numbers are
already in.
The largest retailers due to post earnings next week are Macy's,
Nordstrom JWN.N> and Kohls.
Macy's shares, up almost 8 percent in 2016, could either double that
gain or completely erase it by next Friday according to options
market activity, which points to an 8 percent move in either
direction.
The current 23.1 percent expectation for earnings growth in the
discretionary sector compares with bets on a 13.3 percent gain just
over a month ago. The numbers blend reported numbers and up-to-date
estimates and are compiled by Thomson Reuters I/B/E/S.
If the estimate holds, it will be the largest quarterly earnings
percentage growth for the sector since the third quarter of 2010.
Coming off of a 12.8 percent increase in year-on-year earnings in
the last quarter of 2015, the sector is also expected to post
double-digit growth every quarter through the first three months of
2017.
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Even with those outsized expectations, the estimates have not
translated into massive investor interest. The discretionary sector
index is up 1.2 percent year to date, compared with a 0.6 percent
increase for the S&P 500.
"Discretionary could send a signal to the market with good
second-quarter guidance," said Brian Jacobsen, chief portfolio
strategist at Wells Fargo Funds Management in Menomonee Falls,
Wisconsin. "Strong numbers would mean the economy will avoid
recession, and could send (the S&P 500) to new highs."
Jacobsen recommends his clients be overweight in the discretionary
sector, but noted there is a high degree of skepticism among
investors that the sector can maintain solid growth.
On top of the earnings, retail sales data is due on May 13. It will
be scrutinized for clues on the health of the consumer after an
unexpected 0.4 percent fall in March, weighed by auto sales.
Forecasts call for a 0.7 percent expansion in April.
(Reporting by Rodrigo Campos, additional reporting by Saqib Ahmed;
Editing by Meredith Mazzilli)
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