Home Depot's Bear Case: Why the Stock Could Keep Falling

The bear case starts with the numbers, and they tell a clear story of a business under pressure. For the third quarter in a row, Home Depot missed its profit target. The company posted adjusted earnings per share of $3.62, falling short of the $3.84 consensus. That's not a one-off miss; it's a trend that's raising serious questions about the company's pricing power and cost control.

The top line showed a different picture, with revenue beating expectations. But the quality of that growth is what matters, and there, the story is weak. Total comparable sales grew just 2%, with U.S. sales up only 0.1%. That's far from the kind of robust demand that would support higher prices or justify a premium valuation. In fact, management acknowledged that consumer uncertainty and continued pressure in housing are disproportionately impacting home improvement demand.

This is where the real-world signal comes in. When sales are flat and profit is missing, you have to ask: are people still coming into the store? The answer is a clear no. Store visits declined sharply, falling 3.9% year-over-year in the first quarter of 2025. That's a fundamental breakdown in consumer engagement. If the parking lot isn't full, it doesn't matter how many new products you have on the shelf.

Put these three numbers together-the third straight profit miss, the anemic comp sales growth, and the falling foot traffic-and the thesis becomes undeniable. The core issue isn't a temporary weather event or a minor operational hiccup. It's a tangible slowdown in consumer demand for home improvement. When people are anxious about the economy and the housing market is in a funk, big renovation projects get delayed, and that's exactly what's hitting Home Depot's bottom line. The stock's reaction to this data is the market's common-sense verdict.

The Real-World Smell Test: Housing and Consumer Sentiment

The financial numbers don't lie, but they only tell half the story. To understand why Home Depot is struggling, you have to look outside the balance sheet and into the real world where people make spending decisions. The setup here is a classic "perfect storm" of weak fundamentals.

First, consider the housing market. This is the bedrock of home improvement demand, and it's in a deep funk. The U.S. home turnover rate-the number of homes changing hands-is at its lowest level in decades. About 28 out of every 1,000 homes changed hands between January and September, a rate not seen since at least the 1990s. When people aren't buying or selling homes, they're not doing major renovations. That directly hits the core of Home Depot's business. Fewer new homeowners means fewer "first-time" projects, and fewer existing homeowners are likely to take on big jobs when they're uncertain about their own housing situation.

Then there's the consumer. People are feeling more pessimistic. According to recent research, consumer sentiment in the United States dropped considerably compared to the start of the year, with the percentage of people feeling pessimistic rising sharply. This isn't just a headline; it's a behavioral shift. As the article notes, Americans who have grown more anxious over the economy were definitely a contributor to Home Depot's weak quarter. When people are worried about their finances, they trade down. The data shows that 75 percent of consumers reported trading down in at least one category. That means they're cutting back on big-ticket home projects to save for essentials or experiences, a clear sign of budget pressure.

Home Depot's own CEO pointed to a specific, tangible factor that hit sales: the weather. He cited the lack of violent storms in the third quarter as a key reason for weaker sales in certain categories. That's a direct, on-the-ground signal. Storm damage drives demand for roofing, siding, and other repair materials. When storms don't hit, that demand vanishes overnight. It's a reminder that even a strong brand can't manufacture demand when the external conditions simply aren't there.

Put these three factors together-the stagnant housing market, the anxious consumer, and the absence of weather-driven demand-and you see the full picture. It's a multi-pronged headwind that's difficult to overcome. The company isn't making a mistake; it's being squeezed by powerful, real-world forces that are keeping people from spending on home improvement. That's the smell test that the stock market is reacting to.

Valuation & Analyst Sentiment: The Bear Case Numbers

The numbers on the balance sheet tell one story, but the valuation tells another. Right now, the market is pricing Home Depot as if it's still a high-growth, premium company, which is a major red flag for the bear case.

The stock's forward P/E sits at 25.19. That's a rich multiple for a business that's missing profit targets for a third straight quarter. When a company's earnings are falling short, its valuation should contract, not hold steady. This high multiple suggests investors are still betting on a quick turnaround that the fundamentals don't support. It's a classic setup where the price doesn't reflect the current reality.

Analyst sentiment is turning sharply cautious, which aligns with the market's skepticism. Last week, Stifel cut its rating to Hold, citing a "challenging" near-term outlook for the entire home-improvement sector. The firm explicitly warned that the category is likely to be "at best stagnant and potentially deteriorating" ahead of tough holiday comparisons. This isn't a minor tweak; it's a fundamental reassessment of the business cycle. Stifel's downgrade and lowered estimates show that even the most seasoned observers see no clear path to recovery in the near term.

The stock's reaction to the last earnings miss was the most telling signal of all. Shares fell roughly 4% to 5% in pre-market trading. That swift, negative move after the numbers were out shows where the real money is betting. It's a common-sense verdict: when the profit misses and the guidance weakens, the stock gets punished. The pre-market drop is a direct vote of no confidence from traders who see the same weak traffic and housing data we've discussed.

Put these three signals together-the rich valuation, the cautious analyst downgrade, and the sharp stock reaction-and the bear case numbers add up. The market is slowly but surely adjusting the price to match the tougher reality. For now, the stock still looks expensive relative to its current performance, and the signals from both analysts and traders point to more downside before any meaningful recovery.

Strategic Pivot: Can the Pro Business and Culture Win?

Home Depot isn't just waiting for the housing market to recover. The company is making a massive, multi-year bet on a strategic pivot, pouring billions into building a new engine for growth. The centerpiece is its Complex Pro business, which it has aggressively expanded through a wave of acquisitions. Management has spent $20 billion+ on M&A ahead of the December Investor Day to strengthen this segment. The idea is clear: while the retail side struggles with weak consumer demand, the professional contractor segment is more insulated and offers higher growth potential. This heavy investment is the company's primary counter-argument to the bear case.

The long-term plan is built on a grand scale. At its recent conference, Home Depot laid out a vision for a $1.1 trillion total addressable market. The company is framing its strategy around a "market recovery case," betting that once housing starts to turn, its deep pro relationships and scale will allow it to capture outsized share. The message from CEO Ted Decker is one of confidence in the fundamentals, stating the company is uniquely positioned to grow market share through its culture and investments.

Yet, this plan faces a divided front. Analyst sentiment is split between near-term pressure and long-term potential. On one side, firms like Stifel are cutting ratings, warning that the near-term setup is too challenging and that any shortfall in Complex Pro growth will intensify scrutiny. They see the immediate headwinds-weak housing, consumer anxiety-as overwhelming the strategic investments. On the other side, some analysts argue Home Depot remains well-positioned despite consumer anxiety, viewing the pro business as a durable moat that can weather the current storm.

The quality of this long-term plan hinges on execution and timing. The $20 billion in M&A is a huge commitment, and integrating those businesses effectively is a complex task. More importantly, the entire "market recovery case" is a bet on a housing rebound that is not yet in sight. The company's own preliminary outlook for fiscal 2026 shows a market that could be flat, with sales growth of just 2.5% to 4.5%. That's not a recovery; it's a slow grind. The plan is sound in theory, but its payoff is years away, while the stock is being judged on quarterly results that are currently missing.

The bottom line is that the strategic pivot is necessary but unproven. It's a classic "kicking the tires" moment for investors. The heavy investment in the pro business is a smart move for the future, but it doesn't solve the problem of a parking lot that isn't full today. Until the company can demonstrate that its pro segment is growing fast enough to offset the retail weakness, the bear case remains intact. The long-term vision is compelling, but the near-term reality is one of pressure, and that's what the stock is pricing.

Catalysts and Risks: What to Watch in 2026

The bear case is built on today's reality: weak traffic, a stagnant housing market, and a stock priced for perfection. The path to a recovery, or further decline, will be determined by a few clear signals in the coming months. The primary catalyst is a housing market rebound. Leading economists see a potential turning point. NAR Chief Economist Lawrence Yun predicts home sales will increase by about 14% nationwide in 2026, driven by lower mortgage rates and more inventory. That's the kind of fundamental shift that could finally re-ignite the home improvement cycle. If it happens, it would validate Home Depot's long-term "market recovery case" and provide the external demand its business needs.

The key risk, however, is that this rebound doesn't materialize. Zillow economists have turned bearish, forecasting a national home price decline of -1.7% between March 2025 and March 2026. That's a direct counter to the optimistic sales forecast and points to a market that remains under severe pressure. A prolonged housing slump would confirm the worst fears, keeping consumer anxiety high and delaying renovation projects for years. For Home Depot, this would mean the strategic pivot to the pro business would be under even more scrutiny, as the core retail demand stays weak.

So, what specific signs should investors watch? The first is stabilization in store visits. After a sharp 3.9% drop in the first quarter, the decline has moderated to 2.5% year-over-year by July. That's a positive sign of stabilization, but it's not a recovery. The stock will need to see visits turn positive, signaling that people are finally returning to the stores. A sustained rebound in foot traffic would be the clearest real-world signal that consumer demand is improving.

The second critical metric is the performance of the Complex Pro segment. This is the company's $20 billion+ bet on the future. Investors need to see this business grow fast enough to offset the weakness in the retail side. Any shortfall here, as warned by Stifel, would intensify scrutiny and likely pressure the stock further. The goal is to see the pro segment not just grow, but accelerate, demonstrating that Home Depot's strategic pivot is working.

The bottom line is that 2026 is a year of waiting for a catalyst. The stock's fate hinges on whether the housing market rebounds or continues to slump. The evidence is mixed, with bullish sales forecasts clashing with bearish price predictions. For now, the smart money is watching those store visits and the pro business numbers. Until those signals turn decisively positive, the bear case has a clear path to play out.