Again at highs, stocks to take cues from consumer

By Lewis Krauskopf

NEW YORK (Reuters) - A U.S. stock market that rose again to record highs on Friday on the back of a robust employment report will take its cues next week from a facet of the economy that also has shown signs of strength: the consumer.

Quarterly earnings reports from department store operators including Macy's, luxury goods companies such as Michael Kors and entertainment company Disney will set the tone for Wall Street, with investors also eying U.S. retail sales data due on Friday.

"The consumer, in our mind, is a lever that could cause equities to trend higher," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. "Next week will be telling ... If retail sales suggest that spending is beginning to pick up that could bode well for performance."

Stocks headed into next week on a positive note, with the S&P 500 rising to a fresh intraday all-time high on Friday after two weeks of little change to the benchmark index.

On the heels of a tepid second-quarter growth report, the jobs data painted a rosier picture of the economy. Recent data has shown solid consumer spending, including higher-than-expected outlays in June as households bought more goods and services.

"Anything that really would suggest that the consumer is starting to step up and pick up a little bit more of the load would give you some optimism that maybe we can get an earnings break-out at some point," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio.

After a tepid first half, the S&P consumer discretionary sector has climbed more than 4 percent since the end of June, helping lead the market along with tech and healthcare.

With two-thirds of the consumer discretionary sector reporting so far, second-quarter earnings are expected to have climbed 12.5 percent, better than the 9 percent rise expected at the start of July, according to Thomson Reuters I/B/E/S.

To continue the momentum, department store operators, including Macy's, Kohls and Nordstrom, will be in focus after gloomy results a quarter ago.

With about 85 percent of the overall S&P 500 already reported, second-quarter earnings are expected to have fallen 2.6 percent, not as dire as feared at the start of July. However, third-quarter profits are now expected to be negative.

The retail sales report will provide a further sense of the economy's health, but it also could give the Federal Reserve more ammunition to raise interest rates later in the year.

After the strong jobs data, traders boosted bets that the central bank could raise rates as soon as December.

"It continues to be a system in which you need the consumer to demonstrate some strength, but not too much strength because if it's too much strength then now (Fed Chair) Janet Yellen gets into the picture," said Jeff Weniger, senior strategist at BMO Wealth Management in Chicago.

Some investors worry stock valuations have become too expensive. The S&P 500 is trading at 17.1 times earnings estimates of its component companies over the next 12 months, well above its average of 14.5 times over the past five years.

Countering those concerns is sentiment that with bond yields low, investors will stay attracted to stocks, especially those with lofty dividends.

(Reporting by Lewis Krauskopf; Editing by James Dalgleish)