Earnings Outlook: Retailers Report on How the Consumer Really Feels

Summary

• Equity markets continue to trade sideways with little to push them much higher or lower. It remains a stockpicker’s market.
• On the positive side, advertising spend is picking up, providing anecdotal evidence businesses are becoming more confident that a recession is not coming.
• Only 25 companies report this week, but they include major retailers Home Depot, Walmart, and Target. Together, they should give a bottom-line assessment of how consumers are faring this summer.

What We Learned Last Week

It was another placeholder week – markets trading in a narrow range with a slow leak. The S&P 500 was down 0.3%; the more volatile NASDAQ 100 (NDX) and Russell 2000 (RTY) shed 1.6% and 1.5%, respectively. The big concern (if that is the right word) was the 10Y Treasury bouncing around in the 4.00-4.15% range and threatening to rise.

We still think the equity rally is on hold and that equities are stuck in a range for now. Quite simply, there is no clear catalyst to push equities much higher or lower.

Earnings are registering solid beats – at last count, S&P 500 (SPX) earnings are running 7.5% above consensus; sales are 2% better. This is more a statement about analysts being taken in by companies issuing conservative guidance. The key information has been company outlooks, and those have varied widely.

Last week, we highlighted several pairs of companies that beat expectations, but one rallied and the other sold off due to their outlooks. We continue to see a similar pattern. Examples include:

One bright spot during this earnings season has been a pickup in advertising volume. Alphabet (GOOG), Meta Platforms (META), New York Times (NYT) and even beleaguered News Corp (NWS) have reported rising advertising. We have viewed the advertising drought of recent quarters as an anecdotal indication of weak business confidence amid recession concerns. More and more people are throwing in the towel on the recession scenario.

Balanced against that positive note is an ongoing comment from many industrial companies that provide components and semi-finished goods to other companies that produce goods for final demand. They commonly note soft demand because their customers are still working off excess inventories that they accumulated to protect against supply-chain disruptions.

The good news here is that most companies are becoming confident that the supply chain problems of a year ago have largely receded. But there is still a nagging concern that the slowdown in intermediate product demand is being driven as much by softer consumer demand as destocking.

Between these company-specific situations and differences across sector, it is little surprise that there has been no rising tide to lift all boats this time around.

The Week Ahead

The pace of earnings slows substantially this week, to about 25 companies. But they include several major retailers, among them Home Depot, Walmart and Target. Together they should shed a bright light on how the consumer is faring even as recession fears all but disappear.

Tuesday

• Home Depot (HD) is caught somewhere between a strong housing sector and consumers that seem less willing to shell out dollars for stuff. Lately consumers have had the upper hand, and that seems unlikely to change.

Wednesday

• Cisco Systems (CSCO) has been in the news lately due to comparisons of its soaring 2000 stock performance/valuation and subsequent struggles compared to Nvidia’s (NVDA) boom this year.
• Given Applied Materials (AMAT) makes equipment for producing semiconductors, it should benefit from spending related to the $280bn Chips and Science Act, even if it cannot cash in on the AI boom.
• Synsopsys (SNPS), maker of electronic components and chip-related technology, is in the same boat – does it see CHIPS money coming its way?

Thursday

• Walmart (WMT) will likely trumpet its growing market share in groceries – the question will be to what extent are people buying less per visit or off-brand products.
• Target (TGT) will give a read on consumer appetite for affordable discretionary items. It may also have something to say about back to school demand now that virtually all schools are back to in-class teaching.
• Everyone will be waiting for what Tapestry (TPR) has to say about its planned acquisition of Capri Holdings (CPRI).
• The retail giants will get most of the press, but speciality retailer TJX Cos (TJX) will also be a key indicator of the consumer buying mood.

Friday

• Caterpillar’s (CAT) robust results will create high expectations for farm equipment manufacturer Deere & Co. (DE).
• Madison Square Garden jumped 10% in late July when it entered the midcap S&P 600. Now, is it winning its fair share of consumer entertainment dollars?
• Estee Lauder (EL) is a luxury good in a market where luxury is becoming less of a necessity – but it also helps people look good when they go back to the office and off to the casino or concert hall for fun. Which wins?

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)