Target, Walmart Combine to Send “Recession Warning”

Stocks took a step back today following the absolutely massive rally of the last few weeks. Investors seemed to reassess the odds of a hard economic landing this morning while short-term bulls took profits on fears that rate cuts may be further away than they hoped. The Dow Jones Industrial Average and Nasdaq Composite both dipped by nearly 0.3%, while the benchmark S&P 500 saw a slight decline of 0.1%.

The recent upward trend in stocks was fueled by growing conviction among investors that easing inflation would signal an end to the Fed’s tightening efforts. The Dow had been on a four-day winning streak, closing Wednesday at its highest level since August.

However, some on Wall Street are now questioning whether the market’s expectations for a policy shift might be overly optimistic. This skepticism arises particularly in light of the resilience shown in Wednesday’s retail data and Target’s earnings. Pimco CIO Daniel Ivascyn expressed caution, noting there was “too much enthusiasm” about potential rate cuts and emphasizing that “the inflation problem is far from being solved.”

Walmart’s earnings report, released this morning, helped undo much of the pre-market hawkishness that was sparked by Target’s quarterly results.

Walmart CFO John David Rainey highlighted some changing retail trends observed in the latter half of the third quarter compared to its beginning. When asked about the impact of the restart of student loan payments on October 1 on sales trends, Rainey acknowledged it likely played a role, admitting there is “no doubt” it had some effect on Walmart’s quarter. Despite this, Rainey noted “pretty good strength” in demand for Walmart’s pre-holiday promotions in November.

But Walmart’s guidance left much to be desired, which raised concerns about consumer health moving forward. The company reported a third-quarter revenue of $160.8 billion, a 5.2% increase from last year and surpassing expectations of $159.13 billion. Walmart’s US same-store sales grew 4.7%, exceeding the anticipated 3.35%. However, the quarter also revealed signs of strain among consumers, with sales of general merchandise like apparel and home goods declining by a mid-single-digit percentage.

Walmart raised its full-year earnings per share guidance to $6.40 to $6.48, slightly higher than its previous forecast of $6.36 to $6.46, but still below the expected $6.48 amid mixed sales trends. Following this, Walmart shares dropped by 7% in over an hour of trading.

Target’s outlook for the holiday season also lacked confidence. Target chairman and CEO Brian Cornell, in a call with reporters, described the consumer as “resilient” amidst various financial challenges, including student loan repayments and persistent inflation. Cornell’s tone on the call was cautious, with Target’s holiday quarter EPS guidance reflecting this sentiment. The company projected fourth-quarter EPS in the range of $1.90 to $2.60, compared to estimates of $2.23.

Despite the cautious outlook, investors seemed to overlook Target’s holiday season concerns, focusing instead on improved margins and profits. After a challenging period marked by operational missteps, rising retail theft, and cautious consumer sentiment, Target significantly exceeded analyst estimates for sales, margins, and earnings, leading to a 17% surge in its stock post-report.

That being said, guidance from both retailers smelled very “recessiony,” which could lead to some shock selling if future data looks soft. Bulls want the economy to cool, but they don’t want an imminent recession.

It’s all about getting economic data that’s “just right.” And, with a critical holiday season approaching, it’s increasingly likely that we’ll get data that’s far cooler (ie, bearish) than bulls would be comfortable with.


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