From Walmart Inc. to Home Depot Inc., the biggest US retailers are about to grab the earnings spotlight, providing stock investors with crucial insight into consumer spending — the engine that powers two-thirds of the US economy.
Last quarter, a bevy of retailers like Target Corp. and Macy’s Inc. held a cautious view. But in recent months, the economy has been resilient with wage gains outpacing price increases and retail sales staying robust. Even consumers are beginning to believe inflation is receding, and economists on Wall Street and at the Federal Reserve have abandoned recession calls.
With the Fed signaling that it’s nearing the end of its most aggressive tightening campaign in a generation, Barclays Plc analyst Adrienne Yih expects US retail shares to outperform in 2024 as pressure on shoppers from inflation and higher borrowing costs eases. The call marks an about-face from three months ago, when Yih flagged recession risks for the group.
How an equal-weighted index of discretionary stocks — which puts Amazon.com Inc. and other members on an even scale — performs versus staples has long been a telltale sign of Wall Street’s view of the economy and investors’ appetite for risk. The ratio has steadily climbed in 2023 — a sign that traders think the economy will skirt a recession over the next year.
“This ratio tells us that investors see brighter times ahead and want to increase risk in their portfolios,” said Thomas Martin, senior portfolio manager at Globalt Investments.
Since the end of May, the S&P Retail Select Industry Index, which is home to Amazon.com, Costco Wholesale Corp. and Dollar Tree Inc., has rallied 16%, more than doubling the 6.8% gain for the broader S&P 500 Index. Surprising strength in retail sales bolstered bulls’ case that Americans are still willing to spend. Since then, Walmart has climbed 9.8%, while Macy’s and Home Depot have both posted double-digit gains.
“We’re trying to get a sense of the health of the consumer because that’s what’s been holding up Wall Street’s optimism on the economy,” said Martin.
US retail sales data for July, due on Tuesday, will offer some more hints. The data are forecast to show demand remained solid last month. And that day, results from Home Depot will reveal if homeowners are pulling back on discretionary spending.
Other high-profile retailers like Target will deliver results on Wednesday, followed by Walmart on Thursday. Kohl’s Corp., Macy’s Inc., Nordstrom Inc. and Lowe’s Cos. will follow in the coming weeks.
Back-to-school shopping is a key event this quarter, particularly for Target, which is looking to regain momentum following a modest sales forecast. While apparel and footwear sellers have struggled amid rising prices, Yih raised her ratings on American Eagle Outfitters Inc., Bath & Body Works Inc., Gap Inc. and Tapestry Inc. to overweight from equal-weight as part of next year’s “offensive positioning.”
Of course, a common headwind for both the discretionary and staples sectors is margin-shredding price pressures, which Bloomberg Intelligence forecasts will remain a key hurdle for retailers in both groups. While inflation has eaten away at discretionary spending within US households, Yih said in a note to clients that prices have been moderating.
What’s more, higher borrowing costs take time to ripple through the economy, so investors are eager to hear companies’ outlook for inflation and profit margins.
“Retailers probably won’t predict a rosy future in the quarters to come,” said Brooke May, managing partner at Evans May Wealth. “But it’s a status quo to set expectations low in an effort to surprise on the upside.”
--With assistance from Kit Rees.