Walmart to Give Key Signal With Shoppers ‘Spending Begrudgingly’

(Bloomberg) — Home Depot Inc. and Walmart Inc. kick off quarterly earnings reports for a slew of retailers next week, offering investors a crucial look at the financial health of US households and a sense of whether consumers can continue to drive strong economic growth.

Wall Street appears optimistic that Americans will keep buying. Analysts project that revenue and earnings growth for consumer discretionary companies in the S&P 500 Index will outpace the broader market for the second straight year in 2024, data compiled by Bloomberg Intelligence show.

The strength of US consumers is top of mind for good reason: Their spending powers about two-thirds of the economy. So encouraging signals from retailers will inspire confidence that household demand will help avert a recession even as interest rates look set to stay at two-decade highs for months to come.

Rosy results and guidance also stand to boost the sector’s shares, which have trailed the market to start 2024. The S&P Retail Select Industry Index has gained 1.5%, while the S&P 500 is up around 5%.

“What Walmart says will be very meaningful to me,” said Michael O’Rourke, the chief market strategist at JonesTrading. “My current view is that the consumer is not ‘happy,’ but is still spending begrudgingly.”

Retail Stocks Have Trailed the S&P 500 to Start 2024

Investors hear from Walmart, America’s biggest retailer, on Tuesday, as well as Home Depot. TJX Cos., Target Corp. and Lululemon Athletica Inc. follow in the coming weeks.

The reports come against a mixed backdrop. The job market was unexpectedly strong in January and inflation stickier than forecast, even as it’s been ebbing broadly. Consumer sentiment improved for a third month in February. But data Thursday showed US retail sales declined in January. Some investors also cited Americans’ dwindling savings as a concern.

For O’Rourke at JonesTrading, the retail sales slump looks like a pullback following the year-end holidays. But the mixed signals are adding to the focus on the earnings ahead.

“The outlook is for a solid consumer,” said John Zolidis, founder of investment adviser Quo Vadis Capital. “But there are some positives and negatives after you look below the most important factor, which is employment.”

Analysts project Walmart will say revenue increased in the three months through January, but at the slowest pace in seven quarters, while profits declined for the first time in six quarters, data compiled by Bloomberg show. Higher labor and product costs are behind the projected earnings drop, according to Jennifer Bartashus at Bloomberg Intelligence. Home Depot, meanwhile, is expected to show declines in both areas.

At Brandywine Global Investment Management, portfolio manager Patrick Kaser said he has concerns about the outlook for consumer-discretionary stocks. The Classic Large Cap Value strategy he co-manages is underweight the sector. He looks at the “remarkably healthy” level of jobless claims and is worried that it may not last. He also points to rising delinquency rates on credit cards.

For now, the job market is proving resilient, and while the Federal Reserve is indicating that it’s likely to keep monetary policy tight for now, officials anticipate cutting rates later this year.

“With the unemployment number where it is right now, with a general view that interest rates will start to come down, we’re still looking at this OK environment,” said Markus Hansen, portfolio manager at Vontobel Quality Growth. While middle-income Americans are spending, they’re trading down when they can, benefiting retailers like Walmart, he said.

Vontobel Quality Growth, the equity boutique of Vontobel Asset Management, added to its Walmart position in the second half of last year, Hansen said. He expects the retailer to deliver strong results Tuesday as it draws more affluent consumers, particularly as it keeps improving its private-label offerings and upgrading stores.

–With assistance from Janet Freund.

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