Financial analysts have modest expectations for corporate revenue growth in the third quarter and expect to see only pockets of strength this reporting season.
They forecast a 21 percent jump in revenue for consumer discretionary companies, compared with a year earlier. That’s more than triple the growth of any other sector in the Standard & Poor’s 500 index.
Since the recession, corporate profits have grown largely as a result of cost cutting. The weak global economic recovery contributed to a 0.7 percent decline in second-quarter revenue from a year earlier. In the third quarter of last year, S&P 500 revenue grew 0.4 percent.
The reliance on slashing expenses has stoked investor fears that the easy cuts have been made and it will be tough for managers to find more. For profits to continue growing, companies will need to generate more revenue.
The biggest revenue gains within consumer discretionary stocks are expected to come from homebuilders. The pace of sales of new homes in August was 13 percent higher than it was a year ago, and analysts expect D.R. Horton to report a 37 percent surge in revenue from a year ago, for example.
Sizeable revenue growth has been scarce, so investors have bid up the stock prices of the few companies that were able to be deliver. They’ll need to keep doing so to warrant continued interest.