"Weekly Outlook" Black Friday puts consumer spending in the spotlight, stock market nearing historical highs

Reuters New York, November 22 - As "Black Friday" kicks off the holiday shopping season, the state of American consumers and the retail industry will be the focus in the coming week. The holiday shopping season may provide clues on how consumers are coping with inflation.

In the past week, the S&P 500 index (.SPX) rose 1.7%, nearing historical highs, as investors savor strong corporate earnings with the earnings season for the third quarter nearing its end. Corporate profits are expected to grow about 9% compared to the same period last year.

However, the forecasts from two well-known retailers present starkly different outlooks: Walmart (WMT.N) raised its annual revenue and profit expectations for the third consecutive time on Tuesday, while Target (TGT.N) predicted that comparable sales and profits for the holiday quarter would fall short of expectations, leading to a sharp drop in its stock price.

The holiday shopping season can provide further insights into consumer spending, which accounts for more than two-thirds of U.S. economic activity. Abby Roach, a portfolio analyst at Allspring Global Investments, stated that although inflation rates have fallen from the 40-year highs reached two years ago, rising prices still pose challenges for consumers.

"It’s easy to get excited about the year-over-year decline in inflation, but... consumers are still under pressure, and I think that’s the biggest pain point," Roach said. "Consumers still feel that their money doesn’t go as far as it used to."

Strong spending before the end of the year may support a recent series of data showing the economy is stronger than expected. While investors welcome signs of economic health, concerns about a potential rebound in inflation remain, which dampens expectations for the Federal Reserve to cut interest rates in the coming months.

A survey conducted by Morgan Stanley earlier this month of about 2,000 consumers showed that Americans are more optimistic about the holiday shopping season than in the past two years, with about 35% of respondents expecting their spending this holiday season to increase compared to last year.

Morgan Stanley analysts stated in the report: "This year, companies may see more holiday cheer, but consumers remain picky, so spending across all categories is unlikely to increase."

The holiday shopping season will also test the stock prices of retailers, which have already shown divergence in 2024.

Walmart's stock price has risen by more than 70%, warehouse retailer Costco (COST.O) is up 46%, and Amazon (AMZN.O) has increased by 30%.

In 2024, discount stores Dollar General (DG.N) and Dollar Tree (DLTR.O) have seen their stock prices drop by over 40% and 50%, respectively, as analysts point out that inflation particularly impacts the low-income consumer base of these companies. Target's stock price has fallen by 12% this year, as value-conscious consumers purchase low-priced essentials from competitors.

Chuck Carlson, CEO of Horizon Investment Services, stated: "Target is indeed struggling to find its unique identity in the retail industry right now." The two sectors of the S&P 500 index, non-essential consumer goods and essential consumer goods, which include most retailers, are expected to rise by 23% and 16% respectively in 2024, while the S&P 500 index is expected to rise by 25%.

Another batch of retail companies will announce their earnings next week, including Best Buy (BBY.N), Macy's (M.N), Nordstrom (JWN.N), and Urban Outfitters (URBN.O).

Investors will also gain new insights into inflation, with the monthly Personal Consumption Expenditures (PCE) price index released on November 27 being a key indicator closely monitored by the Federal Reserve. According to Reuters, the core PCE price index for October is expected to rise by 2.3% year-on-year