The US stock market faces a test! Can retail earnings reports stabilize the market? Focus on these two major questions

Despite a generally successful earnings season for U.S. companies last week, the U.S. stock market is in a downward trend. This week, investors face further tests: a series of retail industry leaders will announce consumer conditions in the coming days. Given that consumer spending accounts for two-thirds of the U.S. economy and that the current quarter is typically the strongest period for retailers, their outlook is crucial for investors. Negative news could impact the overall market situation, as this year's stock market rebound has pushed the S&P 500 index to a record 51 new highs, the most recent occurring after Trump's election victory.

Currently, the market's focus on retail performance is twofold: on one hand, there is the performance guidance for the key holiday shopping season, reflecting the state of U.S. consumption; on the other hand, there is the impact of the tariff plan proposed by President-elect Trump. The largest U.S. retailer, "the American retail consumption barometer" Walmart (WMT.US), will release its earnings report on Tuesday, along with other retailers such as Target (TGT.US) and TJX Companies (TJX.US), the owner of TJ Maxx.

Michael Arone, Chief Investment Strategist for U.S. SPDR ETF business at State Street Global Advisors, stated, "Whether these companies can continue to show good consumer conditions has a significant impact on investor sentiment. I believe consumers may continue to surprise us. I think this data could continue to be a bullish signal for the stock market rebound."

Holiday Consumption

In October, a forecast by the National Retail Federation (NRF) indicated that the growth rate of U.S. holiday sales in 2024 is expected to be lower than last year. The NRF stated that sales in the industry are expected to grow by 2.5% to 3.5% year-on-year in November and December, down from last year's growth rate of 5.3%. According to the organization, consumer spending is expected to reach as high as $989 billion.

NRF President and CEO Matt Shay said in a conference call with reporters, "We all see that consumer spending patterns have become more moderate." He added that overall spending remains strong, although it has slowed compared to the unusually high growth during the pandemic.

Shay pointed out that the calendar effect of fewer shopping days between Thanksgiving and Christmas this year is also expected to negatively impact performance. Overall, based on the analysis of industry forecasts, although retailers are expected to see year-on-year sales growth this quarter, their growth rate may be the slowest since 2018. Moreover, this year's holiday season has fewer days for consumer spending, with five fewer shopping days between Thanksgiving and Christmas compared to 2023 In Arone's view, retailers may take a conservative approach when setting expectations for the fourth quarter, as consumers are financially constrained amid high inflation. However, he said he would not be surprised if company performance exceeds expectations. A holiday spending forecast released earlier by Deloitte also pointed out that high prices have weakened consumer loyalty to brands, although spending on experiences, decorations, and entertainment will drive this year's expenditures.

Mari Shor, a senior equity analyst at Columbia Threadneedle, agrees with this. She stated, "From the perspective of consumers this year, they will indeed show support in important metrics. I do believe it will be a wonderful holiday, but I also think consumers will continue to be very focused on value."

Shor expects volatility in retailers' third-quarter performance. She noted that unusually warm weather in some parts of the U.S. may weaken sales of coats and other cold-weather items, while uncertainty surrounding the presidential election is also affecting consumer confidence. Nevertheless, data released by the U.S. Department of Commerce last Friday showed that retail sales in October increased, driven by a surge in auto sales, with September's data also significantly revised upward.

Looking ahead, Shor is optimistic about companies that can attract consumers with innovative products. For example, Abercrombie & Fitch (ANF.US), sneaker manufacturer On (ONON.US), and Deckers Outdoor (DECK.US). She also believes that Costco (COST.US), Amazon (AMZN.US), and Walmart (WMT.US) are well-positioned for the holiday shopping season, as they offer shoppers discounts and convenience.

In a series of strong earnings reports, Walmart's stock has risen 60% this year, and analysts need evidence that this trend will continue. More broadly, a basket of 78 retail stocks has underperformed the market, rising 8.6% in 2024, while the S&P 500 index has increased by 23% during the same period.

Tariff Threats

With Trump returning to the White House, tariffs will become a new risk facing retail stocks in the coming months. He proposed raising tariffs on goods imported from China to 60% and increasing tariffs on goods imported from other countries to 20%. A study conducted by consulting firm Trade Partnership Worldwide LLC shows that Trump's tariff plan would affect six key consumer categories, including clothing, toys, furniture, household appliances, footwear, and travel goods. The report states that imposing tariffs on these categories alone could reduce Americans' purchasing power by up to $78 billion annually.

Shor believes that, given retailers' exposure to goods from China, tariffs could be a "real issue" for them, especially for dollar stores, home goods, and consumer electronics companies. She questioned whether retailers could pass on higher costs to Americans without harming consumer demand, especially after many companies have already raised prices in recent years.

John Zolidis, founder of consumer-focused investment consulting firm Quo Vadis Capital, stated that retailers may use the upcoming earnings call to discuss strategies for mitigating the impact of tariffs He said, "You will hear companies talk about their risk exposure, what they are doing, how quickly they can act, but they do not provide specific numbers because it is impossible to quantify anything in the current lack of details."

Although the tariff plan has not been finalized, Zolidis expects that companies are overall better equipped to respond than during Trump's first term, as they have more time to prepare contingency plans. Moreover, with the election approaching, the Federal Reserve will continue its easing plan, and he is more optimistic about the outlook for consumer spending. He said, "Like Wall Street, consumers do not like uncertainty. I think short-term consumer behavior may have a good start, especially in an environment where interest rates are continuously declining at the end of the year."