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Expectations High for Retailers, but S&P 500 on Track for Solid Q1 Beat

First quarter earnings season is in its final stages and the retailers are left to bring in the rear. Reports earlier this week from Macy’s, Kohl’s, Nordstrom and Ralph Lauren, coupled with U.S. retail sales data, set a pessimistic tone for the subsector.

Retail earnings growth currently stands at 8.6% for the first quarter. However, many specialty and multiline retailers, including Wal-Mart, Target, The Gap and Home Depot won’t report results until next week. If these heavily weighted companies are not able to meet or beat expectations, growth for the retail group will be negatively impacted, and pressure will be added to the broader consumer discretionary sector.

  • Stock performance for the retail sector has been impressive, with the S&P 500 retailing index up 10% year-to-date. The current forward price-to-earnings multiple stands at 25x, which is ahead of the ten year average of 20x. Needless to say, expectations for the group are high. First quarter results will need to beat estimates and guidance will need to be raised to protect stock performance.  We will keep a close eye on the sector as its earnings season unfolds.

Turning to the overall S&P 500 Index, earnings growth is pegged at 3.0% on earnings per share of $24.81. What a long way we have come from the 3.2% decline that was expected at the start of the reporting season just one month ago.  

  • More strikingly has been the improvement in growth excluding the energy sector. Now at 11.5%, its ahead of the 11.2% rate expected at the start of the season, indicating strength in the remaining nine sectors.  

First Quarter Earnings Per Share Trends

S&P Capital IQ First Quarter Earnings Per Share Trends

  • Growth for all ten sectors are now on track to end better than initially anticipated, demonstrating just how aggressively analysts cut estimates earlier this year. Health care and financials remain the leaders, but now boast of growth rates which have improved substantially from initial projections. Information technology follows in third place. 

All told, first quarter earnings are settling well ahead of expectations despite the numerous macroeconomic headwinds corporations faced during the first three months of the year. 

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