S&P 500 Outlook: Watch Walmart, Target and Home Depot earnings

Josh Warner
By :  ,  Former Market Analyst

Key takeaways

  • S&P 500 remains rangebound, but can retailers prompt a breakout?
  • Economists hope retail sales rebounded in April following two months of consecutive declines, although this is set to be driven by car and fuel purchases.
  • Outlook remains challenging for Home Depot, which may have had a tough start to 2023
  • Walmart is expected to keep outperforming its smaller rival Target
  • Walmart stock trending higher and brokers think it is on course to climb to fresh all-time highs


US retail takes centre stage this week

The US retail sector is under the spotlight this week. We have US retail sales data as well as earnings out from a number of major retailers, including Walmart, Target and Home Depot. This will provide key insights into how US consumers are faring as the economic outlook softens and inflationary pressures weigh on wallets, with fears of a recession later this year still present.

It is also worth noting that some smaller retailers, including TJX and Ross Stores, are also reporting this week.

Let’s have a look at what to expect….


S&P 500 analysis: Where next for the index?

Retail stocks account for over 17% of the S&P 500 and the results this week will be influential considering many are seen as bellwethers for the wider economy.

The index has been rangebound since the start of April. It has tried and failed to break above 4,167.90 on three occasions, making this the immediate upside target than needs to breached. From there, it can look to recapture the peak we saw in February at 4,180, which would see it climb to new nine month highs.

On the downside, we can see 4,056 has held firm as a reliable floor since the end of March, roughly aligned with the 50-day moving average. The 100-day moving average, currently at 4,020, comes back into play below here.

Will the S&P 500 keep up the momentum as retail sector takes centre stage?


April 2023 US retail sales preview

US retail sales have declined for two consecutive months to suggest consumer spending is being impacted by the inflation-driven cost-of-living crisis and higher interest rates. Meanwhile, the year-on-year lift we saw in March was the smallest on record since May 2020.

Retail sales figures for April are due out on Tuesday May 16 and economists are hoping we will see a 0.7% month-on-month increase, according to a poll by Reuters. Inflation may still be much higher than desired, but it is easing and wages continue to grow, keeping hopes alive that spending can hold up.

Economists expect US retail sales to grow 0.7% month-on-month in April 2023

Analysts at Bloomberg Intelligence believe retail sales could rise as much as 1% month-on-month in April, suggesting there is scope for a markedly stronger reading. However, sales growth in April is expected to be driven by spending on cars and fuel but this is set to come in much weaker when these components are stripped out. Credit Suisse anticipates we will see a 0.2% month-on-month drop on this metric.

‘Autos and gas-station sales will boost the April retail print, due May 16. As consumer demand continues to rotate from goods to services, the data will signal a rough road ahead for retailers,’ said Bloomberg Intelligence analyst Eliza Winger.


Home Depot stock: Q1 earnings preview

DIY store Home Depot will kick things off when it releases quarterly results before markets open on Tuesday May 16.

It will be a tough start to 2023. Wall Street anticipates Home Depot will report a 1.3% decline in comparable sales, a 1.5% drop in revenue to $38.3 billion and a 7.1% drop in adjusted EPS to $3.80 in the first quarter, according to consensus numbers from Bloomberg.

Citigroup said seasonal goods may not have sold as well due to unfavourable weather in the period, with overall spending to be pressured by weaker trends for home improvement. Morningstar analyst Jaime Katz agreed and questioned what the impact of the colder start to spring will have on its sizeable outdoor category.

Spending by individuals is under pressure, although this is being countered by more resilient demand from contractors. However, this too could soften if the economic picture softens and more homeowners choose to delay or cancel large building or renovation projects.

With that in mind, Home Depot has already warned that sales will be broadly flat and that earnings will fall by a mid-single digit percentage this year following the boom we saw in DIY demand in wake of the pandemic. That limits room for a further negative surprise this week even if the outlook remains challenging.

‘Though we remain constructive on the industry and the company’s longer-term outlook, near-term challenges may continue to weigh and expectations for flat sales may prove optimistic,’ said Bloomberg Intelligence senior industry analyst Drew Reading.


Target stock: Q1 earnings preview

Target will then follow with results out early on Wednesday May 17.

Wall Street estimates Target will deliver comparable sales growth of 1.2%, a 1.7% rise in revenue to $25.2 billion and a sharp 17.5% drop in adjusted EPS to $1.81, according to consensus numbers from Bloomberg.

Importantly, Target provided a wider-than-usual guidance range for the first quarter, providing room for Target to provide a negative or positive surprise this week. For example, Target has said comparable sales could be up or down by a low-single digit percentage. Not all believe it will grow considering Jefferies warned it is ‘incrementally cautious’ on Target and believes comparable sales will be down 1% in the first quarter, based on data that suggests it has suffered from lower footfall and traffic.

However, Jefferies believes Target could be attractive to investors despite being cautious on the upcoming results. The broker said Target is ‘undervalued with upside ahead as fundamentals improve’.

Target has significantly underperformed its larger rival Walmart over the past year, with the stock down almost 28%! Target is far more exposed to general merchandise than its rival. This has caused inventory problems and made it more difficult to grow sales as consumers have less to spend on discretionary items, while also raising the need to invest more to improve its shopping experience. The shift in spending has also seen more lower-margin products being purchased, like food and household goods.

A key ambition to keep an eye on is Target’s goal to restore its operating margin back above its pre-pandemic levels of 6% within the next three years, having said it could achieve this as early as fiscal 2024. That signals profitability should improve in the second half if it can stay on track. Any delay would signal a slower recovery in consumer demand, and could push Target to make more drastic cost cuts in order to avoid disappointing the markets.


Walmart stock: Q1 earnings preview

Walmart will release earnings before the opening bell on Thursday May 18.

Wall Street is looking for 5% growth in comparable sales, a 4.9% year-on-year rise in revenue to $148.5 billion and a 0.4% increase in adjusted EPS to $1.30, according to consensus numbers from Bloomberg. Cosnensus figures are at the top-end of Walmart’s guidance and some believe it will do even better.

‘We believe Walmart is one of the best positioned in our coverage and our data checks support our view,’ said Jefferies analyst Corey Tarlowe last week. ‘We have new ticket and traffic data indices to estimate comparable sales for Walmart and Target. Given the data, we’re raising our first quarter and full year Walmart comparable sales above consensus and guidance.’

Jefferies is now forecasting Walmart will deliver a 6.8% rise in comparable sales in the first quarter. A beat here would be welcomed considering the consensus suggests comparable sales will slow for a third consecutive quarter. The broker also believes Walmart can beat at the bottom-line, estimating adjusted EPS of $1.34.

‘We’re raising estimates as the company continues to gain share and grow operating income,’ Tarlowe said. The analyst said Walmart’s initiatives, such as the adoption of automation, push into advertising and its Walmart+ membership, are ‘helping to build an attractive and growing flywheel’ that can propel its growth and profitability.

Bloomberg Intelligence analysts also think Walmart can deliver a beat in the first quarter, while analysts at Citigroup see scope for the retailer to raise its annual guidance.

Walmart has risen over 3% over the past year, roughly in-line with the rise we have seen in the Dow Jones Retail Index. Its much larger scale has helped it manage costs more effectively than its smaller rivals and it has reaped rewards from offering a wider selection of food and drink from its grocery arm, which is swallowing up more of monthly pay cheques and attracting more customers looking to consolidate their shopping trips and save money.


Where next for WMT stock?

Walmart stock has risen almost 12% since bottoming-out in the middle of March. Shares opened at their highest level in a year last week before losing some ground. That makes $153.70 – which was also the ceiling we saw in late 2020 - the immediate upside target for the stock. A sustained move above here, having breached this during intraday trade, would bring a move back above $158 onto the cards before the all-time highs we saw back in April 2022 back into the crosshairs.

Notably, the 44 brokers that cover Walmart see even greater upside potential with an average target price of $164.88, showing Wall Street is confident that the retailer can hit new all-time highs.

On the downside, the supportive trendline that can be traced back to mid-March has proven reliable in early May, although a breach below here could see Walmart sink back toward $149.50. A decline toward $146.60 is on the cards from here, although this should prove a firmer floor considering it is aligned with the 50-day moving average and the ceilings we have seen on multiple occasions since 2021.

Brokers believe Walmart stock can hit fresh all-time highs in the next 12 months


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