Shares of specialty retailers and apparel makers helped lead the charge off the market's bottom in March 2009 but unraveled this year, leaving consumer discretionary stocks as the sole sector to still be lower through the first half of 2014. Whether these stocks can snap out of that slump may hinge on what a clutch of high-profile names in the sector has to say about the health of consumer spending next week.
The S&P 500 consumer discretionary sector index .SPLRCD is down 1.1 percent since the end of 2013, the worst performance of any of the 10 macro sectors so far this year, while the benchmark index is up 6.2 percent.
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Profit estimates for the sector have deteriorated as well, shrinking by the most of any sector other than materials since Jan. 1. Earnings are now expected to have risen just 8.7 percent for the year, compared with 13.5 percent at the start of the year, Thomson Reuters data showed.
As profit estimates have fallen faster than stock prices in the sector, price-to-earnings multiples have shot higher, making the group the priciest in the S&P 500 at 18.6 times estimated earnings.
Next week brings results from a couple of the bull market's big performers: Bed Bath and Beyond (BBBY.O) on the retail front and Nike (NKE.N) in sports apparel. Investors will also see earnings next week from Carnival (CCL.N), which has not performed quite as well.
"It's one of the sectors that has really had a lot of the froth burnt out of it," said Quincy Krosby, market strategist at Prudential Financial, which is based in Newark, New Jersey. "Worries over the strength of the consumer, particularly in the lower end and middle, is ... reflected in the shares."
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With turmoil in Iraq and rising oil prices, fuel costs during the U.S. summer travel season may be chief among those concerns, she said. That makes companies' third-quarter forecasts important.
Bed Bath and Beyond is down 25.2 percent for the year, while Nike is down 4.5 percent and Carnival is down 2.6 percent.
Other signs of trouble have come from consumer discretionary companies themselves.
More S&P 500 consumer discretionary companies have warned on the second quarter than any other sector, with 22 negative outlooks - including ones from Bed Bath and Beyond and Carnival - and zero positive ones, Thomson Reuters data showed.
On Thursday, Coach (COH.N)'s shares tumbled when it forecast during an investor day presentation that revenue will fall by low double digits in percentage terms for the year ending June 2015. The stock fell 11.8 percent this week.
"They managed to significantly exceed to the downside an already low bar," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "It's not as if everything in retail is a disaster, but from a stocks standpoint, it would be smarter to underweight positions in retail."
Further clues on the consumer front may come from economic data, with reports on consumption and consumer confidence also due next week.
U.S. consumer spending is expected to have rebounded 0.4 percent in May after dipping 0.1 percent in April, a Thomson Reuters poll showed. The U.S. Consumer Confidence Index is expected to edge up to 83.5 in June from 83 in May.
