Alt text: Young woman walking outside with shopping bags and a cell phone in her hand.

Mega-cap tech stocks released earnings this week, and the news wasn’t great. Google, Facebook/Meta, and Microsoft all stumbled. But two tech giants, Amazon and Apple, were bolstered by the consumer sides of their businesses.

Amazon (AMZN) disappointed on lackluster performance of its cloud-hosting business AWS. But the retail side of Amazon’s business did okay: revenues rose 14.7% from last year, and online store sales rose 7% to $78.84 billion.

Apple (AAPL) made a stronger showing: Quarterly revenue rose 8%, net profit was $1.29 per share, and iPhone and Mac sales were robust – both beating analyst estimates. iPhone 14 demand was also strong; supply chain issues seemed to be the main factor holding back sales.

Amazon and Apple are tech companies with retail influence. And their announcements this week are a sneak-peek into the retail earnings season coming up.

Why retail? Consumer spending has been resilient despite inflation, market turbulence and recessionary fears. If consumers stay strong through the holiday-shopping season, it might provide a soft landing – or possibly lead to a January market rally.

The inflation waiting game

High inflation continues to be the biggest drag on the market. Eventually the Fed’s rate hikes could cool prices and tame inflation – the question is when. And until it’s clear that rate hikes are working, the Fed won’t hesitate to raise rates even further.

If rate hikes could cool high housing prices, that would have a big impact on inflation data. The housing market is extremely sensitive to interest rates, and we’re starting to see sales slowdown and sentiment cool among homebuilders. Any downturn in housing prices would affect inflation data and give the Fed reason to curtail further rate hikes.

Enter the retail consumer, a lone economic bright spot. If consumer spending remains stable, it may calm the markets until housing prices finally drop, lowering inflation and the risk of future rate hikes with it. Decent earnings from retail stocks and continued strength in retail sales could help keep the market chugging for the rest of the year.

chart titled: Consumer Spending Chugging Along. Healthy Incomes & Consumer Balance Sheets Promote Rising Consumption. Chart dates from September 2017 to September 2022. Shows Personal Consumption Expenditures at just above $13,000 as it slowly increases to $15,000 until it dips to just above $13,000 in March 2020, and dips again to $12,000 in April 2020. The expenditures begin to rise again in May 2020 until it peaks at just above $17,000 in September 2022. Source: Ally Invest, St. Louis Federal Reserve.

Consumers have been hanging on

Retail sales data shows consumers holding steady. Retail sales were flat in September, with consumers cutting back on big-ticket purchases but continuing to spend on necessities as well as “extras” like clothing, dining out, and online shopping.

Consumer sentiment has been resilient too, increasing slightly in October from 58.6 to 59.8. According to Ally survey data, 56% of consumers feel confident in their overall personal financial condition, with consumers earning over $100,000 even more likely to feel this way.

Chart titled Wealthier households More Confident. Sentiment Varies By Income Level. Chart shows that 40% of households that earn $50,000 or less are confident about their personal financial condition. It shows that 56% of households that earn between $50,000 and $74,999 are confident about their personal financial condition. It shows that 66% of households that earn $75,000 to $99,999 are confident about their personal financial condition and 78% of households that earn $100,000 or more are confident about their personal financial condition. Source: Ally Invest.

As we wrote in our Q4 Outlook, the strong job market and falling gas prices are continuing to support consumer spending. And expectations are low at the moment – consumers and investors alike are bracing for a possible recession. Some good news may provide fuel for a Santa Claus rally at the end of the year.

Retail stocks to watch

If all of the above conditions break the right way, these stocks could be good indicators:

  • Macy’s (M): In downturns affluent consumers are less sensitive to the economic conditions as demonstrated in the chart above. Macy’s has built a solid digital business reversing the downtrend among large department stores. With the lowest P/E ratio (under 4) in this group, Macy’s will announce earnings on 11/17.
  • Kroger (KR): Everyone is a retail consumer of food. Kroger’s recently announced plan to merge with Albertsons will unite the first and second-largest supermarket chains and give the combined company pricing power to compete. With a P/E ratio around 13 and a growing EPS trend (an average of 16% over the last three quarters) Kroger’s earnings in early December are worth watching.
  • Dollar Tree (DLTR): The company’s sales have grown steadily for years, and lower-end retailers selling staple goods have historically weathered downturns well. With a P/E around 21, DLTR trades at a higher valuation than KR or M but if we see solid earnings growth that above-market multiple may be justified. Earnings should be announced 11/22.

Other big retailers reporting earnings in mid-November: Walmart, Target, and TJ Maxx.

The bottom line

As we noted in the Q4 Outlook, seasonality is on our side. The strongest six-month period of the year usually begins in November, with even better performance in midterm election years. If unemployment remains low, consumer spending steady, and inflation has time to drop, conditions are promising for a Santa Claus rally. Retail stocks might offer the first clues of how likely this outcome will be.

 

Headshot of Brian Overby
Brian Overby
Senior Markets Strategist for Ally Invest

As senior markets strategist for Ally Invest, Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters, and Bloomberg, and has had frequent appearances on CNBC Fast Money and Fox Business News. A veteran of the financial industry since 1992, Brian continually seeks to improve the understanding of the retail investor. He has given thousands of option trading seminars worldwide, written hundreds of articles on investing, and is the author of the popular trading resource The Options Playbook and its free, acclaimed companion site OptionsPlaybook.com. Prior to Ally, Brian was a senior staff instructor for the Chicago Board Options Exchange (CBOE) and managed the training department for one of the world’s largest market makers, Knight Trading Group.