Wall Street Week Ahead: If trend sticks, consumer stocks to boost market

Earnings for the S&P as a whole are expected to have fallen 5.1 per cent in the first quarter.

The US stock market could get a shot in the arm this week as consumer-facing companies report earnings in a season in which the sector has so far been the overachiever.
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 per cent 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 US economy is the consumer".
About 30 per cent of the sector's components on the S&P 500 have not reported earnings while 87 per cent of the index's numbers are already in.
The largest retailers due to post earnings this week are Macy's, Nordstrom and Kohls.
The current 23.1 per cent expectation for earnings growth in the discretionary sector compares with bets on a 13.3 per cent 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 per cent 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.
On top of the earnings reports, retail sales data is due on May 13. It will be scrutinised for clues on the health of the consumer after an unexpected 0.4 per cent fall in March, weighed by auto sales.
Forecasts call for a 0.7 per cent expansion in April.
Even with those outsized expectations, the estimates have not translated into massive investor interest. The discretionary sector index is up 1.2 per cent year to date, compared with a 0.6 per cent 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.