Analysts have forecast the best batch of retail earnings since the third quarter of 2002. But Wall Street is already searching for signs that the rest of the year will maintain the first quarter's momentum.

Broad-based strength is expected to bring an 18.3% rise in first-quarter retail earnings, according to the First Call Retail Index, which follows 137 U.S. retailers.

Blowout employment numbers in both March and April, along with initial jobless claims figures sitting at a four-year low, "should translate directly into stronger consumer spending," said Ken Perkins, research analyst at Thomson First Call.

Other economic data have demonstrated the quarter's strengths as well. Retail sales increased 1% in February and 1.8% in March. Core retail sales, which exclude auto sales, increased 0.6% in February and 1.7% in March.

However, analysts think retail sales for April, to be released by the Census Bureau on Thursday, will drop 0.2% in both total sales and sales excluding automobiles.

But that decline likely won't be enough to make first-quarter sales turn negative, said Michael Gregory, senior economist at BMO Nesbitt Burns. "February and March were terrific months," he said. Instead, he called April's results a "payback," due to both March's warm, dry weather and the Easter holiday shift that pulled sales from April into March.

In all, retail sales have risen 7.7% year over year from January through March, the Census Bureau said. Construction spending, durable goods, housing sales and manufacturing activity also have been up lately.

The strongest categories in the latest quarter likely will be apparel, luxury and consumer electronics. Weakness is seen at department stores, home-building supply and footwear retailers, Perkins said. Many retailers will report first-quarter earnings in the next two weeks, with giants

Wal-Mart

(WMT) - Get Report

and

Target

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posting results early Thursday.

Retailers have lifted their first-quarter earnings expectations during the quarter after it became clear that February's same-store sales results were coming in stronger than originally expected, said Perkins. February is generally the first month of the first quarter for most retailers.

Relatively Speaking

However, on a relative basis, the quality of retail first-quarter earnings could be in question, Perkins noted, because the retail earnings growth rate will fall well short of the 27%-plus increase racked up by the

S&P 500

despite facing an easier year-over-year comparison. A year ago, first-quarter retail earnings grew 3.9%, compared with an 11.7% rise for the S&P.

The two-year comparison looks brighter, though. On that basis, the retail sector is up against a 14.6% comparison, compared with the S&P's 0.6% decline, Perkins said.

The strength of first-quarter retail earnings also was called into question last week after April's same-store sales figures were released. Even though the aggregate data were perceived to be somewhat weak, in part because more than half the approximately 80 retailers First Call tracks missed expectations, it's deceiving -- sales increased roughly 4.3%, continuing the momentum set in the first three months of the year.

In fact, several retailers felt comfortable enough to increase their first-quarter earnings estimates. Perkins said that during the April same-store sales reporting period, positive first-quarter earnings preannouncements outnumbered negative preannouncements by a margin of 2 to 1.

Mike Niemira, chief economist at the International Council of Shopping Centers, noted after the April sales data that 2004's "same-store sales pace continued to be on track for the best annual performance since 1999's booming 6.7% gain."

While many focused on the 4.3% increase in April as a slowdown from January's, February's and March's positive 6% increases, the April results were up against a more difficult comparison from the prior year. April 2003 had a 3.7% aggregate rise in same-store sales, while the first three months of the year were up against positive 1.4% increases or less, according to First Call data.

It's likely retailers became a bit overconfident with their estimates going into April's results considering that January, February and March each had total same-store sales results over 6%. That could have helped inflate congruent analyst consensus estimates.

What Have You Done for Me Lately?

Looking ahead, investors are curbing full-fledge enthusiasm about the quarter's results, because they are more focused on results for the rest of the year. "Strong first-quarter earnings are essentially baked into the cake," Perkins said. "Investors are looking for signs of continued robust future earnings growth."

In the second quarter, Perkins expects retailers' earnings growth will outpace the broader market for the first time since the third quarter of 2002. The expectation is for an 18.2% rise in retail earnings, compared with the 17.7% analysts are calling for from the S&P.

Gregory believes investors should prepare for retail sales in the rest of 2004 to be impacted by as many as three increases in the fed funds rate by year-end. That will dampen credit-sensitive spending on purchases from homes to home appliances, he predicted.

However, job growth has picked up, and income growth should soon follow, said Gregory, which should contribute to consumer confidence. As a result, Gregory predicted an overall 6% to 7% year-over-year retail sales gain.

However Gregory admits his forecast has one main obstacle: rising oil prices. When consumers are faced with higher heating bills, they tend to divert money from discretionary spending. "That casts a question mark about where do

consumers take

spending out -- is it the restaurant or the mall?" he asked.

In addition, the continued confidence of consumers is not a given, Gregory said. While confidence levels have improved lately, the war in Iraq has affected overall confidence. Another stall in confidence could hurt consumer spending for the year.

"If I have to balance the risks, there's a little more risk to the downside because of oil prices and growing uncertainty

in consumer confidence," Gregory said.