The consumer discretionary sector, which accounts for nearly 15% of S&P 500 market capitalization (the third largest of the ten sectors) still has as about 20% of its constituents left to report results. Retailers will account for the majority that 20%, giving the industry group significant influential power over the performance of the sector in the weeks ahead.
That being said, many heavy hitters of the retail industry group (Target, Lowe’s, Home Depot and TJX Companies) will have to beat their expected numbers by very wide margins if total S&P 500 Index earnings growth is going to have a chance of moving into positive territory (which is unlikely in our opinion) and avoid the first decline in quarterly earnings growth since the 2008-2009 recession.
With leading earnings growth (+16% in Q3), the consumer discretionary sector has the best market performance year-to-date +7.6% versus the 1.7% decline in the S&P 500 Index. Within consumer discretionary, retail accounts for 41% of the market cap and has the best price performance with the retail index up 18.4% YTD. Driving retail, is the internet and catalog industry’s strong performance thanks to Amazon.com, Netflix and to a lesser extent Expedia.
As far as earnings go, the internet and catalog companies have all reported results. The multiline and specialty retailer industries have the most constituents yet to report and will close out the retail industry group earnings season this week.The specialty retail industry is important because it accounts for 45% of retail industry group market capitalization and as a unit are expected to achieve 10.8% earnings growth in the third quarter.
Home improvement specialty retailers Home Depot and Lowe’s are the largest retailers in this industry left to report and as such they have the biggest ability to move the needle. Strength should continue to come from the home improvement retailers, auto retailers and those with a significant online presence, as has been exhibited in the monthly retail sales reports from the government.
Detailed Retail EPS Growth Estimates & Performance Metrics by Industry
Source: S&P Capital IQ. 2015 YTD data as of November 13, 2015.
Mixed results from Macy’s, Kohl’s, JCPenney and Nordstrom leaves the outlook for traditional retailers in question. High levels of inventories, increased promotions and unseasonably warm weather present investors with little to get excited about heading into the 2015 holiday shopping season.
While the health of the consumer remains solid in our opinion, given the improvement in jobs, spending, confidence and more recently wages, the consumer remains picky about where they shop and spend their money. We believe that retailer earnings growth prospects should be assessed on a stock-by-stock basis as the aforementioned themes continue to play out.