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Wal-Mart, Home Depot, TJX could reverse retail's earnings disaster

  • Big chain stores — such as Wal-Mart, Home Depot, Target and TJX — report earnings.
  • The next round of retail earnings could change the tone after department-store disasters.
  • The earnings season is the best in years, with more companies optimistic.
  • Traders are watching China data and Fed surveys.
Butterball frozen turkeys are displayed for sale at a Wal-Mart Stores Inc. location ahead of Black Friday in Los Angeles, California, U.S., on Tuesday, Nov. 26, 2013.
Patrick T. Fallon | Bloomberg | Getty Images
Butterball frozen turkeys are displayed for sale at a Wal-Mart Stores Inc. location ahead of Black Friday in Los Angeles, California, U.S., on Tuesday, Nov. 26, 2013.

Earnings season saved the worst for last with a major retail bombshell, but now it will be up to Wal-Mart, TJX, Home Depot and others to change the industry's tone in the week ahead.

Retailers always bring up the rear in earnings season, with more than 450 S&P 500 companies already reporting as of Friday. Feeling the continued pressure from online sales, department stores Macy's, Kohl's, Nordstrom and Dillard's soured what has been a strong earnings season. Their stocks continued to get slammed Friday, with Macy's down 18 percent for the week and Nordstrom down 16 percent.

The big chains are being crushed by too much floor space, in a world where consumers are increasingly going online instead of to the mall. April's 0.4 percent gain in retail sales, while below estimates, still signaled that consumers are reasonably healthy but may have changed spending patterns. April online sales rose 1.4 percent. One bright spot was that March headline retail sales were revised higher to show a slight 0.1 percent gain, from a decline.

Wal-Mart reports earnings this Thursday, and TJX and Home Depot report Tuesday in another week dominated by retailers' earnings. Of those three, only Wal-Mart is expected to see lower profits, with earnings per share down about 2 percent, according to Thomson Reuters. Off-price retailer TJX, down less than 2 percent for the week, may be a winner as the slide in department stores deepens.

Retailer earnings/sales expectations for week of May 15

Source: Thomson Reuters

Reports are also expected from discount chain Target, which has been struggling of late, and Gap and Urban Outfitters, both in the weak apparel space.

Earnings for the S&P 500 companies so far are up nearly 15 percent, thanks in part to an outsized pop in energy earnings based on favorable comparisons for oil in the first quarter, according to Thomson Reuters. That's the best earnings growth since 2011.

The afterglow of a strong earnings season could help support stocks in a week with little economic data.

"You have to look at what's happening in the retail sector as an anomaly in the context of overall S&P 500 earnings," said Dan Suzuki, equity strategist at Bank of America Merrill Lynch.

He said companies are more confident in their earnings outlooks, though he believes this is the peak quarter for earnings gains, in part based on the energy bounce. "For the last two months in a row, you've seen more instances of companies guiding above expectations than below," he said. "That ratio of above versus below is almost double the historical average."

The ratio of above-vs.-below consensus earnings guidance rose above 1.0 in both March and April, the highest levels since late 2014 and well above the long-term average of 0.6.

BofA also studied earnings comments on conference calls to gauge the attitude of companies and finds that they are more upbeat than they've been in a long while. The use of the word "better," compared with uses of "worse" or "weaker," was at the highest level since 2010.

Stocks managed to suffer relatively small losses in the past week even as retailers were ripped; social media stock Snap got whacked, and the big expected rebound in economic data was less significant than many hoped for.

On top of that, there was one of the biggest ruckuses out of Washington since President Donald Trump entered the White House.

Sideshow on the 'showboat'

Washington in the past week put on one of the biggest sideshows yet over the president's firing of FBI Director James Comey, who was investigating the Trump campaign's ties to Russia. Trump said he'd been itching to fire him all along and that he was a "showboat" and "grandstander." But though the ill-timed firing created an explosion of criticism, lots of finger-pointing, and calls for a special prosecutor, stocks showed little impact.

There was little fallout in markets. But the big risk is that the bipartisan and in some cases partisan squabbling over Comey could slow down efforts to move forward on a new health-care plan and tax reform. The prospect of tax reform has been supporting stock prices, though investors have been lowering their expectations for when it might be approved.

Suzuki said investors are split over whether tax reform could happen this year or whether it will now be into next year. "It's 50-50 in terms of people who think it's going to get done this year," he said. If it starts looking like it will be later, rather than sooner, that's when the market could get hurt.

"That's why we think, even though we have such a stellar first-quarter earnings season, the risk/rewards turn negative over the next several months. We think the market will turn higher at the end of the year, but between now and then there will be a lot of chop," he said.

The VIX, CBOE's Volatility index, dipped to a decade low below 10 just before Comey's firing. By the end of the week it was just up to 10.40, still a very low level signaling lots of market complacency. It's not just stocks, as the low volatility has crept into currencies and bonds.

The S&P 500 was down 0.3 percent for the week, at 2,390. The Nasdaq was positive, up 0.3 at 6,121. Treasury yields, which move inversely to prices, were lower on the week. The 2-year yield, which most reflects the activity of the Fed on interest rates, edged down to 1.28 percent.

Suzuki said he expects stocks to end the year higher but he would not be surprised to see a 6 to 7 percent decline in the S&P, down to about 2,200.

"You had the political support for optimism around tax reform. That's likely to fade in the coming months. You had the backdrop of improving global growth and confidence over the last couple of months. You've seen some of the major PMIs globally start to roll over," he said.

Suzuki, like other analysts, is watching China to see if signs of slowing there increase. Industrial production and retail sales for China will be reported Sunday night, well ahead of the U.S. open Monday.

In the U.S., there is Empire State manufacturing data Monday and the Philadelphia Fed survey Thursday. Both are important early indicators of the state of business activity in the second quarter.

What to Watch

Monday

Earnings: Trivago, Nippon Telegraph, Noah Holdings, DXP Enterprises

8:30 a.m. Empire State manufacturing

10:00 a.m. NAHB survey

4:00 p.m. TIC data

Tuesday

Earnings: Home Depot, TJX Cos, Dick's Sporting Goods, Weibo, Red Robin Gourmet Burgers, Urban Outfitters, Jack in the Box, Vodafone, Staples, Manchester United

8:30 a.m. Housing starts

8:30 a.m. Business leaders survey

9:15 a.m. Industrial production

Wednesday

Earnings: Target, L Brands, Cisco System, Tencent, American Eagle Outfitters, Flower Foods, ZTO Express, Rexnord

7:00 a.m. Mortgage applications

Thursday

Earnings: Wal-Mart, Alibaba, Applied Materials, Autodesk, Salesforce.com, Gap, Burberry, Ralph Lauren, McKesson, Ross Stores, Buckle, Eagle Materials

8:30 a.m. Initial claims

8:30 a.m. Philadelphia Fed survey

1:00 p.m. Cleveland Fed President Loretta Mester

Friday

Earnings: Campbell Soup, Deere, Foot Locker

9:15 a.m. St. Louis Fed President James Bullard