The Retail Earnings Crucible: Can Consumer Spending Survive the Tariff Test?

The S&P 500’s 18% rebound since mid-2024 has been built on a fragile foundation: the assumption that U.S. consumers remain resilient to inflation, tariff volatility, and slowing income growth. This week’s earnings reports from Target, Home Depot, and Lowe’s will put that faith to the test. While equity markets have priced in a rosy scenario of sustained spending, the fundamentals—shrinking savings rates, trade-down behavior, and Walmart’s price-hike warning—paint a far murkier picture. The divergence between valuations and reality is now at a critical inflection point. Here’s why investors must pay close attention and adjust portfolios accordingly.

The Tariff Test: Why Retailers Are Ground Zero

Retailers are the canaries in the coalmine of consumer health. Their earnings reflect real-world trade-offs: Can consumers keep spending as tariffs and inflation erode purchasing power? Walmart’s recent warning that price hikes are unavoidable—and will hit everything from groceries to home goods—underscores the stakes. A 2% reduction in discretionary spending across the board, as analysts estimate, could strip $100 billion from GDP growth, compounding Q1’s 0.3% contraction.

The tariff truce with China has done little to calm uncertainty. While imports surged to record levels in Q1 (a 0.3% GDP drag), businesses remain in “wait-and-see” mode. . Target’s shares have lagged the broader market since late 2024, reflecting investor anxiety over its reliance on discretionary categories like apparel and electronics—sectors now seeing sharp trade-down trends.

Fundamentals Under Siege: Data That Can’t Be Ignored

The numbers tell a story of fraying consumer confidence:
- Savings Rates: The personal savings rate plunged to 3.9% in March—the lowest since 2022—as households dip into reserves to sustain spending.
- Inflation Anxiety: The University of Michigan’s April survey showed year-ahead inflation expectations hit 6.7%, a 45-year high.
- Trade-Down Behavior: Three-quarters of consumers are opting for cheaper alternatives, with low-income households cutting meat/dairy purchases by 51% and high-income groups shifting to generic brands.

Meanwhile, the labor market’s cracks are widening. While unemployment remains at 4.2%, jobless claims have risen, and wage growth has slowed to 3.6%—the weakest in four years. For retailers, this means fewer households can afford splurges on big-ticket items like home appliances or outdoor gear.

Earnings Week: The Three Tests That Matter

This week’s reports from Target, Home Depot, and Lowe’s will reveal whether consumer spending is truly holding up—or if the cracks are spreading.

1. Target: Can It Survive the Discount Store Squeeze?

Target’s Q1 results will show if its “value” strategy—shifting toward lower-price items—is offsetting the collapse in discretionary demand. . If margins shrink further due to price cuts, it’s a sign the company is losing pricing power—and that consumers are trading down to even cheaper alternatives like Walmart or dollar stores.

2. Home Depot vs. Lowe’s: The Housing Market’s Last Stand

Both retailers are betting on a spring rebound in home improvement demand. But with mortgage rates near 7% and housing starts down 12% year-over-year, the data is grim. . If these giants report weak traffic or inventory clearance issues, it signals a broader slowdown in consumer investment—critical to the economy’s 4.72% annual retail growth forecast.

3. Walmart: The Price Hike Canary

Walmart’s earnings will be the ultimate litmus test. Its ability to pass rising costs to consumers without triggering further trade-downs will determine whether the “lower middle market” can sustain spending. If Walmart’s same-store sales miss expectations, it’s a red flag for the entire retail sector—and a reason to rethink valuations for S&P 500 staples like Coca-Cola or Procter & Gamble.

Investment Strategy: Prioritize Resilience, Avoid Overvaluation

The time to act is now. Here’s how to position portfolios for what earnings week reveals:

Buy: Retailers with Pricing Power or Tariff Hedging

• Costco (COST): Its membership model and bulk purchasing scale allow it to absorb costs better than peers.
• Amazon (AMZN): Dominates e-commerce, where growth remains strong (projected to hit $2.82 trillion by 2030). Its Prime ecosystem insulates it from trade-down pressure.
• TJX Companies (TJX): Thrives on discount retail, capitalizing on trade-down trends.

Avoid: Sectors Overvalued on Strong Consumer Assumptions

• Auto Retailers: If Target’s results show discretionary weakness, auto stocks (e.g., Ford, Tesla) face pressure as consumers delay big purchases.
• Luxury Goods: Brands like LVMH or Ralph Lauren could underperform if trade-down behavior spreads to higher-income brackets.

Monitor: The Fed’s Next Move

The Federal Reserve’s June decision will hinge on these earnings. If data confirms slowing demand, a rate cut could buoy markets—but it won’t fix the fundamentals. Investors must weigh the short-term rally potential against long-term valuation risks.

Conclusion: The Tariff Test Could Trigger a Valuation Reset

The S&P 500’s 18% rebound since mid-2024 has been built on a bet that consumers will keep spending no matter the odds. This week’s earnings will test that thesis. If retailers report weakness, it could force a brutal reckoning: overvalued sectors will face downgrades, and investors will flee to defensive plays with pricing power. For now, the stakes are clear: act on fundamentals, not sentiment. The retailers’ results will decide whether the market’s optimism—or its overvaluation—is the real canary in the coalmine.