The U.S. stock market could get a shot in the arm next 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 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 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.
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)