Investors wait for U.S. consumer profits to match share hype

NEW YORK – The plunge in oil that drained energy shares was also supposed to boost disposable income for consumers. Companies from automakers to retailers are still waiting to see that trickle down to their bottom lines.

That poses a risk for the second-best performing group in the Standard & Poor’s 500 Index this year, according to John Carey of Pioneer Investment Management. Companies that depend on consumers’ discretionary income have rallied 4.5 percent in 2015 amid optimism over spending, trailing only a 6.6 percent gain for health-care companies among the 10 major industries.

“People are being slow to put that extra disposable income to use,” Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion, said in a phone interview. “The memory of the last economic downturn lingers in peoples’ minds. Both baby boomers and younger families are looking more towards savings.”

Eighteen percent of consumer discretionary companies in the S&P 500 missed analyst estimates for both earnings and revenue in the fourth quarter amid an unexpected drop in U.S. retail sales, Bloomberg data show. That’s the highest portion of companies in the group to fall short on both measures in a year, and the third-worst quarterly performance for the industry since 2009, according to data compiled by Bank of America Merrill Lynch.

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Consumer discretionary shares in the S&P 500 decreased 0.5 percent at 9:51 a.m. in New York. The broader benchmark gauge slipped 0.4 percent to 2,066.29.

Retail sales

U.S. retail sales fell for a third straight month in February, according to a report last week. Auto dealers, building-material outlets and department stores were among the merchants that suffered through record cold and snow in parts of the Northeast and Midwest. The measure dropped by the most in almost a year in December.

That contrasts with economist expectations that a nearly 60 percent plunge in oil prices from a June peak will boost discretionary spending among consumers as they devote a smaller portion of their paycheck to filling their gas tanks.

Stocks in the consumer group have shown resilience even amid weaker-than-forecast quarterly reports. Bed Bath & Beyond Inc. dropped 6.8 percent after announcing third-quarter earnings and revenue in January that fell short of consensus analyst estimates. McDonald’s Corp. lost 1.5 percent after posting results that missed forecasts. Both companies have rallied more than 2.8 percent since the initial plunges following their earnings reports.

That optimism didn’t extend to Wynn Resorts Ltd., which slid 6.2 percent after missing projections for both profit and sales. The company’s stock has plummeted 15 percent since then and now sits at an almost two-year low.

Investor optimism

The strengthening job market and still-low gasoline prices are among reasons most economists remain optimistic on the outlook for consumer spending, the biggest part of the economy. And with the U.S. nearing the end of a bitter cold winter, Terry Morris of National Penn Investors Trust Co. thinks the long- awaited boost in spending could still materialize.

“The theory was they’d benefit from lower energy prices, and we’re still waiting for that to show up,” Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Penn.-based National Penn Investors Trust, said in a phone interview. “The benefits are still there, potentially, but it looks like they’re being deferred.”

In addition to conservative spending, investors in consumer stocks must consider the effect that the strongest dollar in a decade is having on corporate exports, according to Russ Koesterich of BlackRock Inc.

Strong dollar

Shares of Tiffany & Co. fell the most in more than 10 years earlier this year after a sluggish holiday season spurred the luxury jewelry chain to cut its annual forecast. The stronger dollar was a contributing factor, eating into international sales, turning 9 percent growth in Europe into a 1 percent gain when converted into U.S. currency.

Consumer-discretionary companies are also going to need to see an acceleration in sales if they wants to live up to investor expectations, Koesterich said.

As he considers the possibility of paring exposure to consumer discretionary shares, he’s not alone. Savita Subramanian, head of U.S. equity strategy at Bank of America Corp.’s Merrill Lynch unit, maintained the firm’s underweight view on the group in a client note Monday, based on the earnings results over the past few quarters.

“Consumer stocks have rallied on hopes for a spending rebound,” Koesterich, the New York-based chief investment strategist at BlackRock, wrote in a client note Monday. “Unfortunately, the reality is not matching the thesis. If it does not materialize soon, it may once again be time to pull back from this sector.”

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