Dare to Bet Against the U.S. Consumer?!

This week, major U.S. retailers like Walmart (WMT), Target (TGT), Home Depot (HD), and Lowe's (LOW) are slated to report their latest quarterly earnings, offering a key glimpse into the current state of consumer spending and its impact on the retail sector amidst ongoing economic uncertainties. 

Discretionary spending remains impacted by inflation and trade tensions. Retailers heavily focused on non-essential goods may face headwinds. Concerns surrounding tariffs and their potential impact on prices are a significant factor influencing consumer confidence and spending decisions.

Consumer spending is a dominant force in the U.S. economy, accounting for about two-thirds of GDP. Therefore, the performance of these major retailers provides crucial insights into the overall economic health. 

While consumer spending has remained resilient overall, concerns about inflation and the ongoing trade disputes persist. Last week’s U.S. retail sales increased solidly in July, supported by strong demand for motor vehicles as well as promotions by Amazon (AMZN) and Walmart (WMT), though a softening labor market and higher goods prices could curb consumer spending growth in the third quarter. 

Retail sales rose 0.5% last month after an upwardly revised 0.9% gain in June, the Commerce Department's Census Bureau said. Sales increased 3.9% on a year-over-year basis. Motor vehicles led the almost broad rise in sales, with receipts at auto dealerships advancing 1.6% after rising 1.4% in June.

This morning, Home Depot (HD) kicked off the busy week for retail earnings. Earnings per share came in light at $4.68 adjusted vs. $4.71 expected and revenue also missed slightly at $45.28 billion vs. $45.35 billion expected. 

Despite the miss, Home Depot stuck by its full-year outlook. The home improvement retailer reiterated that it expects full-year total sales to grow by 2.8% and comparable sales, which take out the impact of one-time factors like store openings and calendar differences, to rise about 1%. Home Depot’s results reflect that the company is still waiting for a greater pickup in home improvement activity, whether spurred on by higher housing turnover, lower mortgage rates or consumers’ own shift in mentality.

CFO Richard McPhail said there are encouraging signs in the retailer’s business: big-ticket transactions, which the company defines as over $1,000, rose 2.6% compared to the year-ago quarter. Twelve of its sixteen merchandising departments posted year-over-year sales gains. And year-over-year sales trends improved in each month of the quarter, with comparable sales up 0.3% in May, 0.5% in June and 3.3% in July.

With the jobs market showing cracks last month – only 73,00 positions were added and the previous two months revised down by 258,000 – this may also add uncertainty around the consumer. Full employment with a 4.2% unemployment rate has lent support to consumer spending ,but what happens if the jobs market shows further weakness? 

Inflationary pressures are also creating headwinds as last week’s CPI and PPI showed. A rate cut is expected in September according to the CME Fedwatch tool, which sits at about an 83% probability as of Tuesday morning. Rate cuts would be a positive for the retail sector and for a potential increase in consumer spending. 

While this quarter may be clouded by tariff concerns, inflationary impacts, and high interest rates, the key maybe the expectations from the retailers. Pay close attention to forward guidance from companies regarding consumer demand and the economic outlook as they may hold the key to the expectations in the near term. 

This earnings season is crucial for understanding the evolving consumer landscape and its implications for the retail sector in the face of persistent economic challenges. With the massive impact of consumer spending on equities, investors will be seeking clarity on how these dynamics will impact retailer performance and the broader market in the coming months.