First quarter earnings in the S&P 500 index were significantly better than expected overall as all ten sectors beat consensus estimates. However, there was one very interesting trend which emerged. Wall Street may be a little too bullish on the Consumer Discretionary sector at least in terms of the fundamentals.

Consumer discretionary lagged the rest of the S&P 500

In terms of earnings growth beat rates, the Consumer Discretionary sector didn’t do as well as the other sectors in the S&P 500, according to S&P Capital IQ Senior Analyst Lindsey Bell. The sector beat estimates for growth by 125 basis points, coming in significantly lower than Healthcare, which took the top spot at a beat rate of 1,229 basis points (All charts/ graphs in this article are courtesy S&P Capital IQ.):

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Earnings growth in the Consumer Discretionary sector came in at fifth place overall, dropping from third place compared to Wall Street’s expectations at the beginning of the first quarter earnings season.

Expectations for Consumer Discretionary falling

When stepping out to full year earnings for this year, the Consumer Discretionary sector is expected to report the third largest year over year growth rate at 11.03%. In first place is Healthcare at 11.4%, while Financials takes second place at 11.18%.

Interestingly, expectations for the Consumer Discretionary sector within the S&P 500 have declined quite a bit since the beginning of the year. The segment was expected to lead the index with a growth rate of 16.9% at the beginning of the year. However, the segment has seen the fourth-biggest decline in expectations for earnings growth for the current calendar year, according to Bell.

Analysts slash estimates for Consumer Discretionary sector

Within the Consumer Discretionary sector, analysts have been slashing their estimates right and left. The biggest declines came in the Consumer Durables and Apparel (from 12.7% growth to 3% growth) and Automobile and Components subsectors. These cuts happened within only five months.

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One reason the reason the Consumer Discretionary sector is struggling this year is because retail sales have been slow since the beginning of the year. Another reason is because GDP growth was slightly negative for the first quarter.

Apparel hit the hardest

According to Bell, apparel and specialty apparel companies have taken the greatest hit in sales so far this year because consumers apparently are less inclined to spend more on these kinds of items. Further, in four of the last six months, sales of department store chains have fallen, demonstrating that J C Penney’s recent struggles are at least part of a broader trend despite its ongoing turnaround attempt.

The analyst also noted that sales for clothing and accessories retailers have been week for most of this year. There was a surprise improvement in the Census Bureau’s data for May, however, signaling that this trend may be about to reverse.

Additionally, she noted a disconnect in the estimate cuts for the Automobiles and Components subsector. Growth estimates were cut from 36.4% at the beginning of the year to 27.2% despite the fact that the industry reported sales of 17.7 million units in May, which she calls “surprisingly strong.”

Netflix, Amazon among those with biggest reductions

Looking at specific companies within the Consumer Discretionary sector, Netflix saw the largest reduction in earnings estimates by far at 69.5%. In second place was Wynn Resorts with a 51.3% reduction in earnings per share estimates, and in third was Amazon with a 41.2% reduction in earnings estimates since the start of the year.

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P/E ratios in Consumer Discretionary remain high

Even though the S&P 500’s Consumer Discretionary sector has seen such dramatic reductions in earnings estimates, Wall Street remains comparatively bullish on it. The price to earnings ratio in the sector is actually higher than the broader market at 19.2 times on a forward 12-month basis, according to Bell. However, she also notes that this is just about in line with the 15-year average of 19.5 times.

The price index for the sector has also beaten the S&P 500, coming in at about 6% compared to the S&P’s 2% increase. Only Healthcare was ahead of Consumer Discretionary at about 9% growth since the beginning of the year.

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Bell suggests that the Automobiles and Components subsector “looks the most attractive” when looking at historical valuations, as they’re trading at 9.9 times compared to their 15-year average of 29.3 times. However, when removing the 2009 valuation, which she called “outsized,” the multiple is more like 19 times.