The American consumer is in a grim mood. Earnings reports due over the next two weeks from some of the nation's largest retailers—including Walmart (WMT), Best Buy (BBY), and Home Depot (HD)—should offer investors a clearer picture of how resilient shoppers have been in the face of persistently elevated inflation, uncertainty over tariffs, and a softening jobs market.
Retailers should also offer more guidance on how newer tariffs are affecting their bottom line heading into the heart of the crucial holiday shopping period. Personal spending accounts for about two-thirds of gross domestic product (GDP), and any sign that consumers are wobbling could signal trouble for retailers and everybody else.
Sentiment vs. spending
The U.S. government shutdown has left investors with almost no official government economic data for a month (and counting). Prior to the shutdown, though, data showed the labor market had been weakening and inflation was ticking higher. So how consumers are holding up is an open question.
People clearly aren't feeling great. The University of Michigan's consumer sentiment index fell to 53.6 in October. That's the seventh-lowest reading in the survey's history, dating to 1952, and down from 70.5 a year earlier. In fact, people feel just slightly better than they did in the summer of 2022, when inflation peaked at 9% annually (and the confidence index hit a record low of 50), and in the spring of 1980, when inflation peaked at 14.6%.
Yet Visa's (V) earnings report in October painted a picture of resilient spending. Visa credited healthy consumer activity and rising transaction volumes for beating analysts' expectations, and said U.S. payments volume grew 8% year over year, with both credit and debit spending rising equally. The company said discretionary and everyday spending remained steady even amid the economic headwinds. E-commerce outpaced in-person transactions, signaling continued strength in digital shopping habits.
But a more complicated story lies beneath Visa's headline numbers. It's a story about a "k-shaped" economy, in which upper-income earners thrive and lower-income workers do not. The Consumer Conference Board's consumer survey for September, for example, found that those earning under $75,000 per year lost confidence, while those earning more grew more optimistic. The largest rise in optimism was seen among those earning more than $200,000.
Still, last quarter retailers said consumers as a whole remained resilient. This quarter investors will be looking for clues to whether that resilience is breaking down.
Paying for tariffs
On tariffs, the dilemma for retailers hasn't changed: absorb higher costs and watch margins suffer or pass them along and risk losing customers who have grown hyper-sensitive to prices after years of elevated inflation.
Last quarter, Walmart executives said the company had eaten the higher tariffs on some items but passed the pain along to consumers on others. Since then, more higher tariffs took effect on dozens of U.S. trading partners, on August 7, about midway through the third quarter, affecting a range of products from avocadoes to cars. So upcoming results from Walmart and others should offer more clarity on how both retailers and consumers are coping.
Electronics retailer Best Buy will be another one to watch. About three-quarters of its products are made in Asia, including around a third in China. Last quarter, Best Buy beat forecasts for revenue and earnings but stuck to its full-year forecast, citing uncertainty over tariffs. The company said it, too, had raised the price of some items due to tariffs, but that tariffs didn't have a material impact on its second-quarter earnings. CEO Corey Barry described its customers as "resilient, but deal-focused."
Interest rates and home improvements
The Federal Reserve's latest interest rate cuts, in September and October, have been a rare bright spot for consumers lately. Though only amounting to half a percentage point, those two cuts helped push mortgage rates to just over 6%, the lowest in about a year. That could boost home-improvement retailers Home Depot and Lowe's (LOW).
Home sales have slowed dramatically as mortgage rates hovered near 7% in the past couple of years, leaving many homeowners feeling "locked in" to their current homes, thanks to pandemic-era mortgage rates as low as 3%. And both Home Depot and Lowe's have been feeling the effects.
Last quarter, Home Depot said it continued to witness a "deferral mindset" among homeowners that dated back to 2023, causing them to put off home-improvement projects. CEO Ted Decker said "some relief on mortgage rates" could help.
Lowe's CEO Marvin Ellison told CNBC that home-improvement activity would likely pick up once mortgage rates fall below 6%.
Holiday shopping and deals
While third-quarter results obviously matter, fourth-quarter guidance will likely be the strongest driver of post-earnings stock moves, and the holiday shopping period will be key to the fourth quarter (and, to a degree, full-year results).
Some may experience a rough season. On average, people expect to spend 10% less this year, according to a survey by Deloitte, which found that consumers were unusually pessimistic about the outlook. A majority (57%) said they expect the economy to weaken in the next six months. That's the most pessimistic outlook since 1997, the year they started asking that question.
In another survey, Visa found 17% of consumers planning to spend more this year, with one-third of them saying they simply had more people to buy for, and one-quarter citing increased confidence in the economy. Nearly 20% of those surveyed said they expected to spend less, citing a lack of extra income or lower confidence in the economy.
Here's what analysts expect from major retailers reporting over the next two weeks:
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HD: EPS of $3.84, up 4.6% from a year earlier, on revenue of $41.1 billion, up 2.2% year over year
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Target (TGT): EPS of $1.74, down 5.9% from a year earlier, on revenue of $25.4 billion, down 0.9% year over year
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LOW: EPS of $2.97, up 2.8% from a year earlier, on revenue of $20.9 billion, up 3.6% year over year
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WMT: EPS of $0.60, up 3.1% from a year earlier, on revenue of $177.4 billion, up 4.6% year over year
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BBY: EPS of $1.31, up 3.9% from a year earlier, on revenue of $9.6 billion, up 1.3% year over year
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