Growing recession fears over the last year have already prompted many consumer discretionary companies to cut costs to boost margins, which may lead to positive earnings surprises this quarter, Melson said. Overall, analysts expect companies in the S&P 500 consumer discretionary sector to grow earnings by 36.5% in the first quarter of 2023 compared with a year earlier, the greatest increase of any sector, according to Refinitiv data. That compares with an expected 5.2% decline in earnings for the S&P 500 overall. Part of that expected growth comes from a job market that has remained robust, helping buoy consumer spending, said Jamie Cox, managing partner for Harris Financial Group. "Consumers are still traveling and spending money on high-end merchandise and people are still living it up," he said.
The sector, with nearly 40% of its weighting in Tesla and Amazon, is up around 14% for the year to date, nearly double the almost 8% gain in the broad S&P 500. Shares of Tesla are up nearly 50% for the year to date, while Amazon is up nearly 22%. At the same time, the Consumer Discretionary Select SPDR ETF has posted positive inflows in five of the last six weeks as investors sent a net $229.1 million to the fund, its largest six-week net inflow since August, according to Lipper data. Some investors, however, believe estimates may be too rosy, especially after last month's crisis in regional banks fueled worries over a sharp cutback in lending. "I think there's a lot of optimism embedded in this sector because of this notion that consumers will stay strong forever, but that's ignoring what's happened in the last month and a half," said Kevin Gordon, senior investment strategist at Charles Schwab. Data on Friday showed U.S. retail sales fell more than expected in March as consumers cut back on purchases of motor vehicles and other big-ticket items, suggesting the economy was losing steam at the end of the first quarter. Meanwhile, U.S. consumer sentiment inched up in April, but households expected inflation to rise over the next 12 months. Sandy Villere, a portfolio manager at Villere & Co, has winnowed his holdings of consumer discretionary stocks in anticipation of a recession later this year.
While still bullish on shares of companies such as Caesars Entertainment Inc and Swiss-based shoe company On Holding AG , Villere has trimming allocations to the sector overall. Once it is clear a recession has taken hold, he hopes to buy shares of retailers hit by the slowdown. "We're expecting the market to look rougher in July and August, and if you did see discretionary retailers get hit and oversold that's usually an opportunity where we would switch and play offense," he said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Estimated Earnings Growth Rates for Q1 2023 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)
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