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Digging Into Consumer Discretionary Leads To Caution

The consumer discretionary subsector of the S&P 500 Index is under a lot of pressure to perform this year, and while we are encouraged by some of the recent economic data, it’s not clear the consumer is out of the woods just yet.

Calendar-year 2015 earnings growth for the consumer discretionary sector is pegged at 11.03%, the third best year-over-year growth, lagging slightly behind healthcare (11.40%) and financials (11.18%).  At the start of this year, consumer discretionary was positioned to be the leader with a 16.9% growth rate. Given mostly sluggish retail sales since the beginning of 2015 and the slightly negative GDP growth reported for the opening quarter of the year, it’s not surprising that the group had the fourth largest decline in anticipated earnings growth since the start of the year (only behind energy, materials and technology).

Within consumer discretionary, cuts were widespread, though the consumer durables & apparel and automobile & components subsectors suffered the largest declines. 

Consumer Discretionary 2015 EPS Growth Estimates by Subsector 

Consumer Discretionary 2015 EPS Growth Estimates by Subsector

Even as growth expectations have been reduced for the consumer discretionary sector as a whole, the sector’s price index has continued to outperform the broader market with a year-to-date increase of approximately 6%, well ahead of the 2% advance in the S&P 500 Index, and only behind healthcare (+9%). The group’s valuation is about in-line with the fifteen year average of 19.5x and is heavily reliant on double digit earnings growth in the second half of the year. While the May U.S. retail sales report was encouraging, especially after the disappointingly soft first quarter retail sales results, retail sales acceleration will be needed throughout the remainder of the year to support strong earnings growth. Expectations clearly remain quite high for the sector, thus we believe investments in the sector should be considered on a specific stock-by-stock and subindustry basis.

For more detail into these observations, please read our full report on the consumer discretionary sector here.

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