Walmart Earnings Key Amid Consumer Spending Woes

Key Takeaway

• Recent earnings from Starbucks, McDonald's, and Amazon highlight concerns over consumer demand amid high interest rates and inflation.
• Walmart and Target's upcoming earnings are crucial for gauging consumer spending trends, with Walmart expected to report its slowest sales growth in three years.
• Analysts focus on discretionary spending weakness, with discount retailers like Dollar Tree and Five Below seen as beneficiaries.

Consumer Spending Under Scrutiny

Recent earnings reports from Starbucks Corp., McDonald’s Corp., and Amazon.com Inc. have raised alarms about the resilience of American consumers, with each company signaling a downturn in demand. Starbucks reported its first quarterly sales decline since 2020, McDonald’s saw US comparable-sales growth fall short of expectations, and Amazon’s e-commerce business experienced weaker-than-expected sales, indicating a trend of consumers trading down to save money. These developments have stoked concerns over consumer spending, which is a critical driver of the US economy, accounting for roughly two-thirds of its activity.

Retail Giants to Test Market Sentiment

The focus now shifts to upcoming earnings from retail behemoths like Walmart Inc. and Target Corp., whose reports are highly anticipated for insights into consumer spending habits. Analysts and investors are particularly keen on these results as retail shares have lagged behind the broader market in 2024. Michael Arone, chief investment strategist at State Street Global Advisors, highlighted the importance of these earnings, noting that companies are becoming more cautious about future growth prospects. The performance of Walmart and Target is seen as a proxy for consumer strength, with their results potentially swaying expectations for economic growth.

Earnings Forecasts and Market Reactions

Analysts tracked by Bloomberg expect Walmart to report the slowest sales growth in three years for the 12 months through January 2025, though they are more optimistic about the company's profit growth. The market reaction to Starbucks’ earnings, which resulted in the company's biggest share decline since March 2020, underscores the high stakes for retail earnings in shaping investor sentiment. John Zolidis, founder of Quo Vadis Capital, anticipates weakness in discretionary spending and suggests that discount retailers like Dollar Tree Inc. and Five Below Inc. may benefit as consumers look to save.

Street Views

• Michael Arone, State Street Global Advisors (Neutral on consumer-discretionary and staples sectors):

  "The big takeaway from this earnings season is that many of the companies are now getting more cautionary on the future quarters, and the growth prospects and the outlook for their businesses. This is a concern for those reports we haven’t seen yet, particularly from the likes of a Walmart or a Target."

• John Zolidis, Quo Vadis Capital (Bearish on discretionary spending):

  "If you’re a consumer and you’re watching what you’re spending, this is just a period you don’t go to stores."

• Savita Subramanian, Bank of America Corp. (Bearish on low-income household consumption):

  "Consumer cracks are emerging," especially among low-income households.

• Jack Janasiewicz, Natixis Investment Managers Solutions (Cautiously Optimistic about broader economy despite concerns over low-income consumption):

  "Consumption by the low-income consumer contributes only about 10% to total personal consumption expenditures, so these initial signs of cracks do not worry me about the broader economy. If this spreads to the middle-income and higher segments, then that will be different."