Retail Stocks Need Unlikely Holiday Miracle to Save Rough 2025
Shoppers in San Francisco, California.
(Bloomberg) — The American consumer is limping into the holiday season.
Most Read from Bloomberg
That was the upshot from a week of big-box retailer earnings that came with signs of caution among shoppers increasingly worried about a softening job market and persistent inflation.
A rally Friday saved Target Corp. shares from the worst week since April after its earnings showed the retailer cut prices at the expense of profits, with customers pulling back from nonessentials like apparel and home goods. Home Depot Inc. dropped more than 5% in the five days, the most since March, after lowering its outlook as strapped homeowners hold off on big-ticket purchases.
Even Walmart Inc., the belle of the retailer ball with huge profits and a rosy forecast, sent an economic warning of sorts. Its shares rallied in the week, but the growth it reported came largely from groceries and mid-tier customers looking for bargains — both signs of skittishness among consumers.
This week’s results, which also included reports from Gap Inc., Ross Stores Inc. and TJX Cos., showed that a growing number of consumers are questioning discretionary purchases while trading down for essentials to stretch every dollar. More worryingly, wealthier Americans who have powered the economy for most of the year are becoming cost-conscious. The mood was captured by University of Michigan’s consumer sentiment gauge, which fell to near the lowest on record this month.
“Consumers remain frustrated about the persistence of high prices and weakening incomes,” the report said.
That’s bad news for an economy driven by consumer spending, especially as persistent inflation may keep the Federal Reserve from cutting rates even as the labor market shows signs of weakness.
“Affordability is a major issue during the pivotal holiday stretch that matters most for earnings growth,” said Timothy Chubb, chief investment officer at Girard, a Univest Wealth Division. “I worry that Corporate America’s revenue growth will slow from here and margins will get squeezed as consumer sentiment sours and the economy and labor market soften even further as companies pass on price increases to cash-strapped shoppers.”
Retailer stocks have been trailing the broader market for several years, especially as AI euphoria sent investor dollars pouring into tech and related bets. But the dynamic is worsening in 2025 as lower-end consumers get squeezed by inflation and the job market.
The S&P Retail Select Industry Index — which includes Macy’s Inc., Costco Wholesale Corp. and Dollar Tree Inc. — is flat for the year. Target is down 35%, Bath & Body Works Inc. is off 62% and Carmax Inc. has lost 57%. Cut-rate retailers like Dollar Tree Inc. and Dollar General Corp., along with online marketplaces like EBay Inc. and ThredUp Inc. have surged.
Investors will get more crucial Christmas shopping season forecasts this week as Best Buy Co., Dick’s Sporting Goods Inc. and apparel retailers Abercrombie & Fitch Co. and Urban Outfitters Inc. report results.
Strong profit outlooks would give US stocks a much-needed tailwind into year-end, with the S&P 500 already down 3.5% this month — heading for its worst November since 2008.
If Walmart lives up to its bellwether status, investors could be in for a rough ride. While its business is humming – the stock rose 2.8% last week — the boost came from spending by upper-income households that usually shop at higher end stores.
“We continue to benefit from higher-income families choosing to shop with us more often,” Doug McMillon, the retailer’s chief executive officer, said. “Middle-income households have been steady. Lower-income families have been under additional pressure of late.”
A similar dynamic boosted off-price retailers TJX and Ross Stores, which reported better-than-expected quarterly sales and boosted their outlook on the expectation that consumers seeking out value will drive growth this holiday season.
The last batch of retailer earnings, culminating Dec. 3 with Macy’s Inc., may flash a green light for investors. But sticky inflation is forcing shoppers to pay more for essentials, and that’s left stores stuck with a glut of products, causing retailers to mark down prices at the expense of profits.
Although inflation has been cooling, Bloomberg Intelligence says price pressures will remain a key hurdle for the discretionary and staples sectors. That’s why retail executives’ tone on promotions and holiday shopping will be crucial.
A cautious approach is understandable. The bad news reflects how inflation, and growing economic uncertainty are weighing on holiday spending plans. And sales from the fourth quarter, traditionally the strongest time of the year, may not be a savior this time around as more stores and chains warn of frugal shoppers.
There’s some reason for hope, though. Holiday spending will surpass $1 trillion this year and set a record despite consumer caution, according to a forecast by the National Retail Federation.
That said, this year’s shopping season is shaping up to be more subdued than last year, with fewer consumers planning to increase holiday spending mostly driven by higher prices, according to data compiled by Michelle Weaver, US thematic and equity strategist at Morgan Stanley.
In fact, 38% of consumers plan to keep their holiday budgets the same, 30% expect to spend more while 23% expect to spend less — resulting in a net increase of 6% spending growth from a year earlier, down significantly from 14% growth in the 2024 period.
With the holiday sales season here, history says the Thanksgiving week means increased volatility for consumer stocks.
“The Grinch is not going to steal Christmas for retailers and shoppers, but holiday promotions and discounts will be crucial to spur holiday spending to support earnings growth and stock prices into year-end,” said Mary Ann Bartels, chief investment strategist at Sanctuary Wealth.
Leave a Comment
Your email address will not be published. Required fields are marked *