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Are U.S. consumers finally tightening the purse strings? That's the main question on the minds of investors as major retailers kick off their quarterly earnings reports this week, starting with Home Depot (NYSE:HD).
The home improvement chain's Q1 results came in below Street expectations, hurt by a delayed start to spring, continued softness in certain larger discretionary projects, and higher mortgage rates.
The retailer's earnings report comes at a time when consumer sentiment is weakening, amid expectations of stickier inflation for some time to come and a tempered outlook for income growth. "Consumer cracks are emerging," especially among lower incomes, warned Bank of America analyst Savita Subramanian.
A few companies like Wayfair (W) and Whirlpool (WHR) have already warned that consumers are cutting back spending on big-ticket items amid higher prices.
Fast-food chains such as McDonald's (MCD) and Starbucks (SBUX) have also sounded the alarm on consumer spending, noting that customers are now pickier and more value-minded.
"There have been a lot of concerns on consumer spending recently," said Scott Feller, consumer sector specialist, Goldman Sachs. "This was in part driven by updates by many of the bellwethers in the sector. It was also due to concerns that April had seen a notable slowdown and was one of the worst months of the retail quarter."
Morgan Stanley this week highlighted a "triple whammy" of headwinds against consumer and retail companies: stagnant and declining unit growth after expansion during the pandemic; moderating pricing power; and consumer and retail valuations de-rating relative to the broader stock market.
Earnings watch: Walmart (NYSE:WMT), which will report Q1 results on Thursday, is expected to report modest upside to the consensus U.S. comparable sales estimates, driven by bargain-hunting shoppers. Also keep an eye on other retailers scheduled to report results next week: Lowe's (LOW), Target (TGT), TJX (TJX), Ross Stores (ROST).