Wall Street overcomes concerns about government yield curve inversion buoyed by strong retail sector earnings. On Aug 21, the yields on 2-year and 10-year U.S. Treasury Notes inverted for a brief period of time in the afternoon. Although, government yield curve steadied at closing, the yield inversion took place for the second time within a week. For many economists, yield inversion of the main yield curve is a clear signal of an upcoming recession.
Notably, on Aug 14, the yield inversion between the 2-year and 10-year bonds happened for the first time since December 2005. Wall Street saw a rout that day following the bond market development. However, on Aug 21, all the major stock indexes ---- the Dow, the S&P 500 and the Nasdaq Composite ---- rallied 0.9%, 0.8% and 0.9%, respectively. Strong earnings results from several retailers boosted investors’ confidence in risky assets like equities.
Strong Retail Earnings
The retail sector has so far reported strong earnings results for the second quarter of 2019, surprising several industry watchers, who were initially expecting weak performance from this sector. Several retailers have added value to their offering like giving more emphasis to ecommerce businesses, quick response and lowering delivery times, which helped them to report solid results.
On Aug 21, Target Corp. (TGT - Free Report) , Lowe's Companies Inc. (LOW - Free Report) and The Home Depot Inc. (HD - Free Report) reported strong earnings results, which overshadowed the negative effects of yield curve inversion. Earlier, retail giants like Walmart Inc. (WMT - Free Report) , The Estée Lauder Companies Inc. (EL - Free Report) and many other retailers reported better than-expected results.
Robust Consumer Spending
The most-important positive feature of second-quarter U.S. GDP is that personal consumption expenditure jumped 4.3%, the highest since the fourth quarter of 2017, after growing a mere 1.1% in the previous quarter.
On Aug 15, the Department of Commerce reported a 0.7% jump in retail sales in July compared with 0.3% in June and the consensus estimate of 0.2%. Notably, online retail sales rose 2.8%. Moreover, core retail sales (excluding sales at auto dealers and gasoline stations) increased 1% in July, surpassing June’s rise of 0.3% and the consensus estimate of 0.4%.
The above scenario clearly shows that U.S. consumer spending has remained robust so far in the third quarter after it rebounded in the second quarter. Notably, consumer spending constitutes around 70% of the U.S. GDP. Therefore, strong consumer spending indicates that the U.S. economy, which is currently in its record 11th year of expansion, will maintain momentum.
Economy to Support Earnings in Near Term
A strong labor market with impressive job additions and an unemployment rate at the lowest level in 50 year, steady growth of worker’s productivity and consequently wages, and muted inflation, which stayed below Fed’s target 2% level will act as catalyst for U.S. consumers, going forward. Importantly, the year-old trade dispute with China, which has worsened in May, failed to deter consumer confidence.
Moreover, recently released economic data such as durable goods orders, industrial production, and manufacturing and service PMI indicate that the fundamentals of the economy are not as bad as projected by some economists.
Likewise, expectation for second-quarter earnings has gradually increased as against a contraction forecast at the beginning of the reporting cycle. A solid foothold in the U.S. economy is likely to provide higher profitability for the country’s corporates.
Our Top Picks
At this stage, we have narrowed down our search to five retail stocks with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Moreover, these stocks performed better than the broader market in the past three months and still have upside left.
PC Connection Inc. (CNXN - Free Report) provides a range of information technology solutions in the United States. It operates through three segments: Business Solutions, Enterprise Solutions, and Public Sector Solutions segments.
The company has expected earnings growth of 15.2% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 9.2% over the last 30 days. The stock has climbed 6.8% in the past three months.
RH (RH - Free Report) operates as a retailer in the home furnishings. It offers products in various categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, tableware, and child and teen furnishings.
The company has expected earnings growth of 10.7% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 5.7% over the last 30 days. The stock has jumped 65.6% in the past three months.
Boot Barn Holdings Inc. (BOOT - Free Report) is a lifestyle retail chain, which operates specialty retail stores in the United States. Its specialty retail stores offer western and work-related footwear, apparel, and accessories for men, women and kids.
The company has expected earnings growth of 20.7% for the current year. The Zacks Consensus Estimate for current-year earnings has moved 7.2% north over the last 30 days. The stock has gained 3.5% in the past three months.
Chuy's Holdings Inc. (CHUY - Free Report) owns and operates full-service restaurants serving a distinct menu of authentic Mexican food in the United States.
The company has expected earnings growth of 8% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 3.3% over the last 30 days. The stock has surged 12.3% in the past three months.
Casey's General Stores Inc. (CASY - Free Report) operates convenience stores under the names Casey's and Casey's General Store. It also operates two stores under the name Tobacco City, selling primarily tobacco products, and one grocery store.
The company has expected earnings growth of 6.9% for the current year. The Zacks Consensus Estimate for current-year earnings has risen 0.2% over the last 30 days. The stock has jumped 29.3% in the past three months.
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