Consumer spending accounts for roughly two-thirds of America’s gross domestic product. Over the past few years, its resilience has also helped power the S&P 500 Index to record after record. And that appears to be continuing, with retail sales rising in July after posting upwardly revised gains in June.
What investors need to know is how long consumers can hold on with the Trump administration’s trade wars, weak job growth and sticky inflation. Consumer sentiment dropped this month and inflation expectations rose, according to preliminary data from the University of Michigan released Friday. So the earnings reports and forward outlooks from Walmart and Target, as well as Home Depot Inc and Lowe’s Companies Inc, will give the market a valuable read on how economic conditions are affecting consumers and the places they shop.”These reports are going to be very important,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “The question that Wall Street and investors are trying to figure out is: We see the tariff numbers going up, are they being passed through, or are the companies’ profit margins getting squeezed?”
More than 90% of S&P 500 companies have reported their results this earnings season. They’re on track for an eighth-straight quarter of growth, with profits estimated to climb by nearly 11% – more than triple the preseason estimate, according to data compiled by Bloomberg Intelligence.
But a bunch of major retailers have yet to release results, meaning there’s still some key data coming on where the economy and stock market are headed. Home Depot reports Tuesday, followed by Target, Lowe’s and Estee Lauder Companies Inc. on Wednesday, and then Walmart on Thursday. Best Buy Co Inc, Dick’s Sporting Goods Inc. and Kohl’s Corp. hit the following week, by which time the consumer picture should be far clearer.
Weaker Spending
“Consumer spending growth has slowed from last year but continues to grow at a moderate pace,” Morgan Stanley economists led by US chief Michael Gapen wrote in a note to clients on Friday. “We expect spending to weaken more later this quarter and in (the fourth quarter) as price increases from tariffs weigh on consumer purchasing power.”For example, Tapestry Inc. has been one of the stars of the retail world, with its shares soaring more than 50% this year after last year’s 77% climb. But investors dumped the stock on Thursday as it tumbled 16%, its biggest drop in two years, after the company said that weakness at its Kate Spade brand and rising tariff costs would weigh on its bottom line. And Advance Auto Parts Inc shares also slumped on Thursday after Chief Executive Shane O’Kelly said on an earnings call that the company anticipates that tariffs “will have a more pronounced impact in the second half of this year.”Despite meaningful tariff-related costs, retailers have largely managed to protect their margins so far. But “the full impact of tariffs has yet to be felt,” analysts led by Irene Tunkel, chief US equity strategist at BCA Research Inc, told clients in a note on August 11.
“Companies are not sounding the alarm about the economy, and recession fears have eased,” Tunkel wrote. “Still, many report that economic uncertainty is weighing on customer behavior and delaying decision making.”
The key consumer event this quarter is back-to-school shopping. It’s particularly important for Target, which cut its sales outlook in May due to tariff uncertainty and has seen its stock price tumble 24% this year. With inflation remaining stubbornly high, consumers are carefully “picking and choosing” what they buy, said Marshal Cohen, chief retail industry adviser for Circana.
“Spending shifts that are occurring across categories, and the consumer’s current prioritization hierarchy, will bring more volatility to this year’s back-to-school and holiday shopping seasons,” he said.
Companies selling necessary goods like food and toilet paper are more insulated from these dislocations than discretionary retailers, which rely more on the willingness of consumers to spend.
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