If you’ve been watching the stock market on a daily basis over the past month and a half, you might feel emotionally exhausted from the increased volatility, or big swings, in the market. To blame? A combination of several items, including disappointing economic data points (manufacturing and services data), uncertainty regarding trade tensions between the U.S. and China, and a resurgence of easing monetary policy around the globe.

Despite all the anxiety, the S&P 500 is less than 1% from its all-time high. And you might not believe it, but it’s also right about where it was a year ago.

As you may be able to empathize, investors are generally feeling pessimistic. According to the latest American Association of Individual Investors (AAII) survey, investors are more bearish (and less bullish) than historical trends. This survey has often been a contrarian indicator. In other words, when the AAII has been this bearish, it’s been a positive sign for the markets. The opposite is also true but to a lesser extent.

Combine this indicator with historical trends of the fourth quarter (typically the best performing time of year for the markets), and maybe investors should be more optimistic?

Earnings season is upon us

Starting Oct. 14, corporations began announcing third quarter earnings results and providing outlook updates for the remainder of the year.

According to S&P Capital IQ, the current consensus estimate is for the S&P 500 to report a decline of 4.2% in earnings growth during the third quarter. Yet, it’s more than likely this will be the consecutive third quarter that the expectation for profitability to shrink is incorrect and positive growth prevails. The S&P 500 has a long history — almost 11 years! — of beating consensus earnings estimates.

To be sure, there will be areas of weakness in the third quarter. Energy and materials will lead the downside in earnings growth as oil prices declined year-over-year and inflation remained lackluster. Technology is also expected to report a decline in earnings growth — something the markets haven’t experienced since the first quarter of 2016.

On the flip side, financials, health care, industrials, and communication services sectors are expected to report positive growth. One sector that could see surprising growth: consumer discretionary. Its current estimate is for about flat growth.

Why so upbeat on the consumer?

The resilience of the consumer has been the foundation of our economy. A tight labor market, solid wage growth, and a larger cash cushion (via savings) has boosted consumers’ confidence to spend. While some recent data points about consumers has shown signs of a pull-back from peaks (in hours worked and job openings), it’s likely those concerns will be tempered by the upcoming third-quarter earnings reports. For instance, homebuilder Lennar and athletic apparel maker Nike already reported upbeat earnings results for their most recent quarter. For Nike, the consumer was willing to pay full prices to get new products and shop online. And Lennar benefitted from lower mortgage rates, but management pointed to the underlying trends in employment as a positive.

Ultimately, the strength of the consumer and continued focus on streamlining costs will result in a solid earnings season for the majority of the consumer discretionary space.

Power of the consumer

While trade remains the largest wild card and risk to the economy and markets, continued strength from the consumer could help soften the impact of any trade-related slowdown in the economy. For example, in 2001 following the bursting of the tech bubble and the attacks of Sept. 11, businesses experienced a sharp contraction in spending (like we are seeing now), but consumption remained positive (though it did slow). The result: one of the mildest and short-lived recessions on record. Interest rate cuts by the Federal Reserve helped as well.

The point is that the power of the consumer should not be dismissed.

Stay invested.

It’s likely that volatility may persist over the coming months as trade headlines may cause the market to continue to swing up and down.  Nevertheless, if you have faith in the consumer and remain invested in a diversified way over the long-term, it may bode well for your financial future.

See how Ally Invest can help you start investing.

Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.

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