While considerably lower than the pace set in the preceding quarter, the advance estimate for second-quarter GDP largely exceeded expectations. Fresh data from the Department of Commerce set recessionary fears to rest. And this was largely possible due to a significant upsurge in consumer spending.
This factor alone was enough to partially negate the impact of a drastic slump in business investment which still managed to shave 1% off last quarter’s figure. Analysts believe that it will be difficult to sustain the pace of consumer spending going forward.
However, the economy is still likely to be sufficiently robust, gaining strength from a strong labor market. This is why it is a good idea to pick up select stocks from the sector that are likely to outperform their earnings estimates.
Consumer Spending Surge Outweighs Investment Slump
The decline in the pace of second-quarter GDP was attributable almost entirely to a fall in business investment. During this period, gross private domestic investment declined to 5.5%. This was the lowest rate recorded since the fourth quarter of 2015. Notably, expenditure on structures dropped 10.6%.
Happily, personal consumption expenditures jumped 4.3% in the second quarter. This was the highest increase experienced in six quarters. Consumer spending alone contributes nearly two-thirds of U.S. GDP. This is why the increase in consumer expenditure was enough to fuel GDP in the April-June period.
Analysts believe that consumer expenditure may not be able to grow at such a furious pace in the quarters ahead. At the same time, the job market remains robust and wage gains are flowing in steadily. These factors are likely to boost spending appreciably over the rest of the year as well as in 2020. (Read: Q2 GDP Beats Estimates on Strong Consumer Spending: 5 Picks)
Hiring Rebounds in June, Unemployment Close to 50-Year Low
The U.S. economy added 224,000 jobs in June, easily exceeding the consensus estimate of 161,000. However, May’s dismal hiring numbers were revised marginally downward, from 75,000 to 72,000. Also, at 172,000, average job additions for the first half of 2019 were lower than 223,000 registered last year.
However, the decline in job growth does not detract from the fact that the economy is continuing to create jobs at a steady pace so far into the expansion. Meanwhile, the unemployment rate inched up from 3.6% to 3.7% as 335,000 individuals joined the workforce, but remained close to a 50-year low. (Read: 5 Business Services Stocks to Buy as Job Gains Rebound)
Consumer Discretionary Space to Witness Higher Q2 Earnings
Earnings and revenue growth for sectors across the board are expected to decelerate appreciably in the second quarter. For the consumer discretionary sector, total Q1 earnings were up 1.6% on 12.6% higher revenues.
Happily as of Jul 26, total Q2 earnings for the sector are expected to be up 2.4% on 12.5% higher revenues. This actually represents an increase in pace, and is far better than basic materials, conglomerates and construction. Earnings growth for these sectors is set to decline 36.2%, 10.9% and 6.7%, respectively.
For the S&P 500 Index as a whole, total Q2 earnings are expected to be flat from the same period last year on 4.1% higher revenues.(Read: A Reassuring Earnings Picture)
The second-quarter GDP report clearly indicates that consumer spending remains in good shape. A robust economy, particularly a strong labor market, is boosting purchasing power significantly, which is continuing to fuel growth for the sector.
Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
SeaWorld Entertainment, Inc. SEAS is a theme park and entertainment company operating primarily in the United States.
SeaWorld surpassed the Zacks Consensus Estimate for earnings in three of the last four consecutive quarters, with an average positive earnings surprise of 35.6%.
Powered with the right combination of the two key ingredients — an Earnings ESP of +11.01% and a Zacks Rank of 2 — our proven model shows that an earnings beat is expected for SeaWorld in the to-be-reported quarter as well.
The company is expected to report second-quarter 2019 results on Aug6.
Rent-A-Center, Inc. RCII is the largest rent-to-own operator in the United States offering durable goods such as consumer electronics, appliances, computers, furniture and accessories.
Rent-A-Center surpassed the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 73.9%.
The company’s Earnings ESP of +3.88% and Zacks Rank of 2, increase our predictive power of an earnings beat in the to-be-reported quarter as well.
The company is expected to report second-quarter 2019 results on Jul 23.
Callaway Golf Company ELY is a designer, manufacturer and seller of golf clubs, golf balls, golf bags, and other golf-related accessories.
Callaway Golf beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 7.7%.
Powered with the right combination of an Earnings ESP of +2.97% and a Zacks Rank of 1, our proven model shows that an earnings beat is expected for Callaway Golf in the to-be-reported quarter.
The company is expected to report second-quarter 2019 results on Aug 8.
BJ's Wholesale Club Holdings, Inc. BJ is an operator of membership warehouse clubs primarily in the Eastern United States.
BJ's Wholesale Club beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 13.9%.
The company’s Earnings ESP of +21.05% and Zacks Rank of 1 increase our predictive power of an earnings beat in the to-be-reported quarter.
BJ's Wholesale Club is expected to report second-quarter 2019 results on Aug 27.
Lululemon Athletica LULU is a yoga-inspired athletic apparel company that creates lifestyle components.
Lululemonathletica beat the Zacks Consensus Estimate for earnings in the last four consecutive quarters, with an average positive earnings surprise of 16%.
Given an Earnings ESP of +0.97% and a Zacks Rank of 2, our proven model shows that an earnings beat is expected for lululemonathletica in the to-be-reported quarter as well.
The company is expected to report second-quarter 2019 results on Aug 29.
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