(Bloomberg) — Last week’s selloff, which comes on the heels of what has been a generally successful earnings season for Corporate America, has investors bracing for one final test: a reading on the state of the consumer from a series of retail bellwethers who report in the coming days.
Not only will the retailers provide projections for the key holiday shopping season, they will likely face new questions about the impact of President-elect Donald Trump’s proposed tariffs plans. Walmart Inc. is set to report on Tuesday, followed by Target Corp., TJ Maxx owner TJX Cos. and a slew of other retailers.
Their outlooks will be critical for investors, given consumer spending powers two-thirds of the US economy and the current quarter is typically the strongest time of the year for retailers. A negative surprise may take a toll on the broader equity rally, which has pushed the S&P 500 to 51 records this year, the most recent coming last week in the wake of Trump’s election victory.
“It has a big impact on investor sentiment, whether these companies are able to continue to show a consumer that’s in good health,” said Michael Arone, chief investment strategist at State Street Global Advisors for the US SPDR ETF business. “I think that consumers will likely continue to surprise on the upside. And I think that data will likely continue to be a bullish sign for the rally.”
Holiday Spending
To be sure, retailers will have to share the spotlight with Nvidia Corp. on Wednesday, as the chipmaker will post quarterly results after the market closes. Otherwise, it’s the group’s holiday outlooks that will be top of mind for investors.
While sales during the traditionally high season for retailers are expected to grow on a year-over-year basis, they will likely do so at the slowest pace since 2018, according to a Bloomberg Intelligence analysis of industry forecasts. Retailers also have less time to capture consumer spending, with five fewer shopping days between Thanksgiving and Christmas this year than in 2023.
To Arone, retailers will likely take a conservative approach in setting expectations for the fourth quarter, with consumers stretched amid still stubborn inflation. But he also wouldn’t be surprised to then see companies beat those muted forecasts, he said.
Mari Shor, senior equity analyst with Columbia Threadneedle, agrees.
“What we’ve seen with the consumer throughout the year is that the consumer does show up for key events,” she said. “I do think it will be a good holiday, but I also think the consumer is going to remain very value focused.”
Shor expects volatility around retailers’ third-quarter results. Unseasonably warm weather in parts of the US likely dented sales of coats and other cold-weather items, while uncertainty around the presidential election weighed on consumer sentiment, she said.
US retail sales advanced in October, boosted by a jump in autos purchases, Commerce Department data showed Friday. September’s data was also marked up substantially.
Looking ahead, Shor is positive on companies that can attract consumers with innovative products, like Abercrombie & Fitch Co. and sneaker makers On Holding AG and Deckers Outdoor Corp. She also sees Costco Wholesale Corp., Amazon.com Inc. and Walmart as well positioned for the holiday season, as they offer shoppers value and convenience, she said.
Shares of Walmart are up 60% this year amid a string of strong earnings reports, and analysts need evidence that this continue to be the case. More broadly, a basket of 78 retail stocks has trailed the stock market, rising 8.6% in 2024, compared with a 23% gain in the S&P 500 during that time.
Tariff Threat
With Trump returning to the White House, tariffs are a renewed risk for retail stocks in the months ahead. He’s proposed raising tariffs to 60% on goods imported from China and to 20% on items from other countries.
Trump’s tariff plans would impact six key consumer categories including apparel, toys, furniture, household appliances, footwear and travel goods, according to a study conducted by consulting firm Trade Partnership Worldwide LLC. The proposed tariffs on these categories alone would reduce Americans’ spending power by as much as $78 billion every year the tariffs are in place, according to the report.
Shor at Columbia Threadneedle sees tariffs as potentially a “real issue” for retailers, particularly dollar stores and home furnishings and consumer electronics companies given their exposure to China. She questions whether retailers would be able to pass higher costs down to Americans without hurting consumer demand, especially after many companies already raised prices in recent years.
Retailers are likely to use their upcoming earnings calls to discuss their tariff mitigation strategies, according to John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital.
“You’re going to hear companies talking about where they’re exposed, what they’re doing, how fast they can move, and without giving specific numbers because it will be impossible to quantify anything given the lack of detail at this point,” he said.
While tariff plans have yet to be solidified, he anticipates companies are generally in a better position to react than they were under the first Trump administration given they’ve had more time to prepare contingency plans. And with the election out of the way and the Federal Reserve on track to continue its easing program, he’s more optimistic about the outlook for consumer spending.
“Just like Wall Street, consumers don’t like uncertainty,” he said. “I think you have potentially a good setup for short-term consumer behavior, especially in a falling interest rate environment as we close out the year.”
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