By means of Lewis (JO:) Krauskopf
NEW YORK (Reuters) – The focus in the coming week will be on the health of U.S. consumers and the retail sector as Black Friday kicks off the holiday shopping season and could shed light on how shoppers are struggling with higher prices.
The benchmark rose 1.7% last week and neared a record high as investors digested the end of a solid corporate reporting season in the third quarter. Earnings are on track and up about 9% from a year earlier.
But recent earnings from two leading retailers produced starkly different outlooks: Walmart (NYSE:) raised its annual sales and profit forecast for the third time in a row on Tuesday, while Goal (NYSE:) shares tumbled after predicting on Wednesday that comparable sales and earnings for the holiday quarter would be below expectations.
The holiday shopping season could provide more insight into consumer spending, which accounts for more than two-thirds of U.S. economic activity. Although inflation rates have eased from 40-year highs reached two years ago, higher prices are still a challenge for consumers, said Abby Roach, portfolio analyst at Allspring Global Investments.
“It’s easy to be excited about inflation coming down year over year, but… consumers are really still under pressure, and I think that’s the biggest pain point,” Roach said. “Consumers still feel like their dollars aren’t going as far as they used to.”
Robust spending through the end of the year could support a recent set of data that has shown a stronger-than-expected economy. While investors have welcomed signs of economic health, concerns remain about a possible recovery in inflation, dampening expectations about the extent to which the Federal Reserve will be able to cut rates in coming months.
As it stands, Americans have a more optimistic outlook for Christmas shopping than in the previous two years, according to one Morgan Stanley (NYSE:) survey of about 2,000 consumers released earlier this month, with about 35% saying they will spend more this season than a year ago.
“Businesses could see some more holiday cheer this year, but spending is unlikely to rise across all categories as consumers remain selective,” Morgan Stanley analysts said in the report.
The holiday shopping season will also be a test for retailer stocks, which diverge in 2024.
Walmart is one of the largest players in the industry by market value and is up more than 70%, warehouse chain Costco Wholesale (NASDAQ:) is up 46%, while online giant Amazon (NASDAQ:), which has a diversified business which also includes cloud computing has increased. 30%.
Other stocks have struggled. Discounters Dollar General (NYSE:) and Dollar Tree (NASDAQ:) are down more than 40% and 50%, respectively, through 2024, as analysts point out that inflation is mainly hitting the companies’ lower-income consumer base. Shares of Target, whose weak forecast came as value-conscious consumers shopped at rival retailers for low-priced basics, are down 12% on the year.
“Target is really struggling to find a unique identity in retail right now,” said Chuck Carlson, CEO of Horizon Investment Services.
The two S&P 500 sectors that most retailers belong to, namely the consumer discretionary and consumer staples sectors, are up 23% and 16%, respectively, in 2024, versus a 25% increase for the index as a whole. Another set of retail earnings is expected in the coming week, including reports of Best buy (NYSE:), Macy’s (NYSE:), Nordstrom (NYSE:) and Urban Outfitters (NASDAQ:). Investors will also get a fresh look at inflation, with the Nov. 27 release of the monthly Personal Expenditures Price Index, which is closely monitored by the Fed. The inflation gauge is expected to have risen 2.3% year-on-year in October, according to Reuters data. “The economy is in a good place. It’s more about coming to terms with several years of high inflation,” said Michael O’Rourke, chief market strategist at JonesTrading. “From a retailer’s perspective, a lot of it is about making sure they protect their margins while at the same time trying to provide that value that’s going to attract the consumer.”
