Wall Street looks for more signs that U.S. consumers are still spending – BNN Bloomberg

(Bloomberg) — Strong results from the largest retailer and a robust monthly sales report have gone a long way to easing concerns about the health of American consumers.

But a number of Wall Street analysts want more evidence and are raising the stakes for next week’s earnings reports from Target Corp., Macy’s Inc. and TJ Maxx owner TJX Cos.

While the headlines are solid—Walmart Inc. is forecasting net sales to rise as much as 4.75% and U.S. retail sales to rise 1% for the year—a look behind the scenes reveals some signs that things aren’t going so well for the consumer.

Walmart customers are buying essentials and looking for bargains instead of spending money. And the company is growing by taking market share from its competitors. For John Zolidis, founder of the consumer-focused investment advisor Quo Vadis Capital, this is “not really a positive, reassuring signal.”

“If you look at the majority of the data that we’ve seen, all the commentary from companies, we’re still in a weakening consumer environment,” he said. “And that’s the bottom line, I think, from the rest of the retailer reports.”

Consumer spending is the biggest driver of growth in the U.S. economy, accounting for two-thirds of it on average, so retail earnings are particularly important. While many companies in the sector have yet to report results, a number of other consumer-facing companies are painting a bleak picture as higher costs strain budgets and pandemic savings are used up.

Restaurant operators McDonald’s and Papa John’s International reported weak quarterly sales as Americans dined out less. Meanwhile, prepared food makers Hershey and Kraft Heinz cut their full-year sales forecasts. And news from Airbnb and Expedia suggests consumers are becoming more selective when booking vacations.

As these reports came in, Michael Landsberg, chief investor at Landsberg Bennett Private Wealth Management, looked not only at companies’ balance sheets but also at how they were responding to what was happening in their business. McDonald’s, for example, introduced a $5 menu to boost falling sales. Walmart is another big barometer, he said.

“Walmart has always said they have low prices all the time, and they have lowered prices on many things,” Landsberg said. “That to me is a sign that the American economy is realizing that consumption is slowing down.”

Looking ahead, investors will be closely watching results from Target, Macy’s and TJX on Wednesday, followed by Best Buy Co. and Dollar General Corp. later in the month. Next week also marks the Jackson Hole economic symposium, where Federal Reserve Chairman Jerome Powell will speak. He has indicated that a September rate cut is “on the table,” which could help consumers pay their bills.

Falling inflation is another major factor affecting spending. The latest figures from the Bureau of Labor Statistics showed that underlying inflation in the U.S. fell for the fourth month in a row in July.

“Overall, recent data points to still-strong but moderating consumption,” said Cayla Seder, macro multi-asset strategist at State Street. “This is consistent with a Fed that is ready to slowly begin cutting interest rates.”

Until then, the outlook for many retail stocks is bleak.

DA Davidson analyst Michael Baker cut his second-quarter and second-half earnings forecasts for several companies, including Target and Ulta Beauty Inc., ahead of earnings releases. Retailers are more likely to cut their second-half forecasts than raise them, he said. In Baker’s view, Walmart is a big winner. Its focus on discounts, combined with better execution, especially in e-commerce, is helping the company gain market share and attract higher-income shoppers.

Dick’s Sporting Goods Inc. is another of Baker’s favorite wholesale stocks because management has set a suitably conservative outlook. He also likes BJ’s Wholesale Club Holdings Inc., which he says is “doing better today than it ever has” and trades at a more attractive valuation than rival Costco Wholesale Corp.

And even after lowering his forecasts, Baker sees hope on the horizon, as retail stocks typically do well during periods of easing. The S&P Retail Select Industry Index has underperformed the overall market this year, but posted its best day in nine months on Thursday following the release of Walmart’s earnings and retail sales report.

“We are here now and the results have shown that more and more consumers are making sophisticated choices,” said State Street’s Seder. “But the spending does not mean that we are yet at the bottom of the economic cycle.”

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