Walmart leads retailers shining spotlight on key market signal

NEW YORK – From Walmart to Home Depot, 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 including Target and Macy’s 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 signalling that it is nearing the end of its most aggressive tightening campaign in a generation, Barclays 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 Ms Yih flagged recession risks for the group. 

How an equal-weighted index of discretionary stocks – which puts Amazon.com 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 climbed steadily 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 Mr 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 and Costco Wholesale, has rallied 16 per cent, more than double the 6.8 per cent 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 per cent, while Macy’s and Home Depot have both posted double-digit gains. 

“We are trying to get a sense of the health of the consumer because that is what’s been holding up Wall Street’s optimism on the economy,” said Mr Martin.

US retail sales data for July, due on Tuesday, will offer some more hints. The data is forecast to show demand remained solid in July. And that day, results from Home Depot will reveal if home owners are pulling back on discretionary spending.

Other high-profile retailers such as Target will deliver results on Wednesday, followed by Walmart on Thursday.

Kohl’s, Macy’s, Nordstrom and Lowe’s will follow in the coming weeks. BLOOMBERG