Retailers’ results may be next test for rally in US stocks

Earnings results from major retailers in the coming weeks will test the strength of the US stock market rally, as investors gain insight into the health of consumer spending and the fallout on company bottom lines from inflation.

As a tepid fourth-quarter results season comes to an end, Walmart (WMT.N) and Home Depot (HD.N) are set to report in the coming week, with other high-profile retailers including Best Buy (BBY.N) and Lowe's (LOW.N) due the following week.

How consumers are faring amid soaring prices will be a critical topic for investors, as some have become more confident that the economy will be able to avoid a severe downturn even as the Federal Reserve continues hiking rates to tamp down inflation, reported Reuters.

One sign of economic resilience came in the past week, when monthly data showed U.S. retail sales increased by the most in nearly two years in January.

“The retail sales numbers were reasonably strong, and we want to see that confirmation come from the retailers themselves,” said Paul Nolte, market strategist at Murphy and Sylvest Wealth Management.

Nolte is considering buying home-improvement retailer stocks that were hit hard in 2022 as the housing market struggled.

Stocks have run up despite underwhelming fourth-quarter earnings that has S&P 500 firms on track to post a 2.8% drop in profits from the year-ago period, according to Refintiv IBES. Other companies set to report next week include chip company Nvidia (NVDA.O), Covid-19 vaccine maker Moderna (MRNA.O) and e-commerce firm eBay (EBAY.O).

The S&P 500 has gained 6.5% so far in 2023 as of Thursday, with stocks bouncing back from a brutal performance last year.

Retail stocks have put up mixed returns so far in 2023. The SPDR S&P Retail ETF (XRT.P), which weights small and large companies fairly evenly, has jumped 17% this year. But the performance has been less rosy for some of the biggest companies.

Shares of Walmart, the world's largest retailer by sales, have gained only 1.7% in 2023, while shares of Home Depot, the top US home improvement chain, are also up 1.7%. Both companies are set to report on Tuesday and will "set the stage for everyone else," according to JPMorgan retail analysts.