Economic data "vacuum period", retail giant financial reports perform "A Song of Ice and Fire": Walmart stable, Target falls, TJX hot.

Since October, the unique environment of the US stock market - with the government shutdown leading to economic data being in a "vacuum period", has left investors in a fog. In this context, corporate earnings reports (especially in consumer stocks) are no longer just isolated company report cards, but also a window to evaluate the health of the US economy, particularly to "peek" at the real situation of consumers. Recently, consumer giants have successively released third-quarter earnings reports, with companies such as Target Corporation, Walmart Inc., and Home Depot, Inc. reflecting different economic landscapes. What kind of American consumption story will their earnings reports tell us? A season of consumer stock earnings reports with differentiation and commonality coexisting It is understood that the overall performance of the US stock Q3 earnings season has been strong. According to FactSet statistics, as of mid-November, 92% of S&P 500 companies have disclosed their performance, with a year-on-year profit growth rate of over 13% in Q3, and over eight out of ten companies exceeding market expectations, providing a macro picture for the performance of consumer stocks. Despite corporate profit growth, consumers' feelings are not the same. The latest Michigan University consumer confidence index preliminary value shows that in November, US consumer confidence index has dropped from 53.6 in October to 50.3, hitting a three-year low. This indicates that ordinary people are worried about price increases and the outlook for the job market, a sentiment that deviates from relatively strong consumption expenditure data. It is worth mentioning that for months, retailers have continuously warned that tariff policies will raise prices. This will exacerbate inflationary pressures that have been ongoing for several years, further squeezing consumer budgets. Within the consumer sector, there is currently a situation of "heaven and hell". Discount retailers like T.J. Maxx and cost-effective consumption are still strong, and the tourism industry is also performing well. On the other hand, there is a sluggishness revealed in the published earnings reports, with Target Corporation as an example, with a more pessimistic performance outlook, market concerns about optional consumption outweighing necessary consumption, mid-tier retailers under pressure, reflecting a contraction in middle-class consumer spending to some extent. This earnings season also reveals the pattern of differentiated consumption in the US, namely strong performance at the high end and pursuit of high cost-effectiveness, while middle-level consumption is under pressure. The differentiation has multiple reasons: persistent inflation and cost of living pressures; low-income groups contributing more to marginal consumption but having more fragile financial situations; high-end consumer groups benefiting from wealth effects, leading to continued strong consumption. This differentiation is making monetary policy decisions at the Federal Reserve more complicated. In contrast to the general weakness, some high-end consumer demand remains strong, such as the still thriving tourism industry. Expedia's third-quarter performance far exceeded expectations and raised its full-year outlook; cruise companies such as Carnival Corporation and airlines continue to report record demand and revenue. This is because the tourism industry relies more on high-end consumers and business travelers, with lower sensitivity to fluctuations in low-income groups. Booking Holdings' multiple performances have exceeded expectations: room nights, total bookings, and earnings per share all experienced growth. The company pointed out that its demand for outbound tourism in the US is very strong. This indicates that the travel budgets of high-income groups are less affected, as they continue to pursue high-quality long-distance travel and vacation experiences. In response to the differentiated consumption pattern, Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management Global Investment Committee, warned that although the broader macroeconomic outlook remains cautiously optimistic, the "K-shaped" economy requires a closer examination. She said she saw a "real crack in low- to middle-income consumption," a group that may only account for 40% of total consumption in the economy, but represents the majority of marginal consumption growth driving the US national economy. Shalett cited data from the Oxford Economics Research Institute to argue that the marginal propensity to consume for the lowest income quintile group is more than six times that of the wealthiest groups. Without their continued support, the future prospects for 2026 will become "increasingly fragile." In other words, only when the lower- and middle-income groups have more money to spend can the US economy truly achieve healthy growth, a point that is increasingly under threat. Earnings reports and signals from retail giants In addition to macro data and trends, it is important to mention key indicators, such as recent reports from retail giants: 1. Walmart Inc.: The "anchor" of essential consumption holds its ground Walmart Inc.'s earnings report released before the market on Thursday showed strong performance. In addition, the retail giant raised its profit forecast for the 2026 fiscal year, reflecting its continued strong growth momentum in an environment of economic uncertainty. As a representative of essential consumption, Walmart Inc.'s performance is expected to alleviate concerns about reduced consumer spending due to cooling job markets, corporate layoffs, and rising prices. Due to its large scale and wide coverage, Walmart Inc. is seen as a barometer of the economy. Chief Financial Officer John David Rainey said in an interview, "We closely monitor consumer dynamics, but are satisfied with our overall business." He also added that the company's operations will continue to maintain a strong momentum. E-commerce is one of the highlights. Walmart Inc. stated that the company continues to expand its distribution range, reduce transportation costs, and expand third-party markets. Rainey noted that overall consumer spending remains stable, although spending by low-income households has "slightly slowed down." Middle- and high-income consumers have not reduced spending, and in some areas, spending by the latter has even increased. 2. Target Corporation: The "barometer" of the middle class is raining Target Corporation's third-quarter earnings report, released on Wednesday, showed mixed results. This large retail company is facing price reductions and soft demand in key product areas. The data shows an adjusted earnings per share of $1.78, higher than analysts' expected $1.71. However, the company's revenue was slightly lower than expected, at $25.27 billion, lower than the expected $25.29 billion. This double result reflects the challenges that the retail industry continues to face, especially in times of economic uncertainty, with declining same-store sales and cautious consumer spending. In this earnings report, key retail indicators like same-store sales fell by 2.7%, below the market's expected decline of 2.1%. Target Corporation's gross margin declined by 10 basis points to 28.2%, reflecting the pressure on product sales due to widening price reductions. After the release of the earnings report, Target Corporation's stock price fell in pre-market trading and closed down 2.77% on the same day. Target Corporation's core customer base is the American middle class, and its earnings can better reflect the consumption confidence and disposable spending of the middle class. It is worth noting that in this earnings report, sales performance in non-essential categories (such as clothing and home goods) was weak, while categories like "food and beverage/hardware" saw growth this season. Looking ahead, company CFO James Lee noted the challenges faced by consumers, such as the recent decline in consumer confidence, and hence lowered profit forecasts for 2025, excluding certain items, with expected earnings per share between $7 and $8 this year, down from the previous guidance of $7 to $9. Same-store sales are expected to decrease by a single-digit percentage in the fourth quarter, consistent with the year-to-date performance. Target Corporation's efforts to return to profitability will continue to require more time. COO Michael Fiddelke emphasized the company's commitment to growth, saying, "We are not satisfied with the current performance and will continue to strive to return to a growth trajectory." Chief Business Officer Rick Gomez also admitted that consumers are still cautious and place more emphasis on product cost-effectiveness. The company recently significantly reduced prices on thousands of everyday items and increased supplies of lower-priced seasonal items like $1 decorations and $10 blankets. Target Corporation is not the only one facing this dilemma. Fast-food giant Chipotle, high-end athletic apparel brand Lululemon, and Deckers (owner of Hoka and Ugg) have not been spared. Chipotle CEO Scott Boatwright noted that the frequency of visits by low- to middle-income customers has continued to decline, with challenges particularly for customers in the 25-35 age group. 3. TJX: Value for money Benefiting from the trend of downgrading consumption, American discount retailer TJX's third-quarter earnings report released on Wednesday looked much more impressive. The report showed that TJX's third-quarter revenue increased by 7.5% year-on-year to $15.12 billion, exceeding market expectations by $260 million; GAAP earnings per share were $1.28, higher than market expectations by $0.06; same-store sales increased by 5%, also better than market expectations. This indicates that consumers are turning to more affordable shopping options as signs of pressure emerge in the US economy. TJX is the largest discount retailer of footwear, apparel, accessories, and home goods in the US, operating chain brands such as TJ Maxx and Marshalls. The company's chain stores sell designer products and branded goods at discounted prices by purchasing unsold inventory from full-price stores. This serves as an indicator for observing consumption by low-income groups and the "treasure-hunting" mindset. Looking ahead, TJX currently expects a 4% increase in full-year same-store sales for the 2026 fiscal year, up from the previous expectation of 3%; expects a full-year pre-tax profit margin of 11.6%, up from the previous expectation of 11.4% to 11.5%; expects diluted earnings per share for the full year to be between $4.63 and $4.66, better than the market's general expectation of $4.60, previously expected to be $4.52 to $4.57. Company executives emphasized in the earnings call, the "treasure hunt" model is popular, with its "offline treasure hunt" experience and designer and branded goods priced well below their suggested retail prices having strong appeal to consumers of all income levels who are seeking value for money. The company is also seen as having "anti-fragile" characteristics in economic fluctuations. Apart from TJX, discount chain store Dollar Tree, which serves the poorest consumers most affected by inflation, is also worth noting. The company will release its third-quarter earnings report on December 3. The company's second-quarter earnings report showed a 6.5% increase in same-store sales for the quarter and an adjusted earnings per share of $0.77. The company stated that there is a significant shift in the types of customers visiting stores. CEO Mike Creedon said on the earnings call that households with incomes over $100,000 made significant contributions to the recent quarter's growth. The core low-income customer group "remains with us," while at the same time, there continues to be "significant growth" in middle- to high-income families. Dollar Tree reiterated its full-year outlook and told investors that it expects earnings growth to accelerate in 2026 and beyond. However, the company also warned that tariffs, supply chain disruptions, and labor costs may pressure profit margins in the coming year. Retail analysts say that the trends mentioned in Dollar Tree's report are playing out across the entire discount industry. As consumers continue to prioritize value-for-money goods, discount chains like Dollar General, Five Below, and Ollie's also report an increase in visits by high-income shoppers. 4. Home Depot, Inc. and Lowe's Companies, Inc.: Declining home improvement retail This year, due to economic uncertainty and persistent high inflation, Americans have been postponing major home improvement spending. Recently released earnings reports from Lowe's Companies, Inc., and Home Depot, Inc., are also joining the ranks of competitors, with both expecting weak growth in annual profit and sales. The products these two companies sell (building materials, tools, appliances, gardening supplies, etc.) mostly do not belong to the "essential" category of daily immediate consumption. Lowe's Companies, Inc.'s earnings report shows that excluding one-time factors, the industry's core indicator of same-store sales is expected to remain flat year-on-year, compared to the previous expected range of flat to 1% growth. In addition, Lowe's Companies, Inc. has lowered its adjusted earnings per share outlook for the year to around $12.25, down from the previous range of $12.20 to $12.45. American households are struggling with rising expenses, from groceries and auto insurance to healthcare, combined with rising borrowing costs and a cooling job market. Even though mortgage rates have fallen after the Fed's rate cuts, these factors have weakened the momentum for an expected recovery in demand. Home Depot, Inc. also lowered its full-year profit forecast on Tuesday, failing to meet Wall Street's quarterly earnings expectations for the third consecutive quarter. CFO Richard McPhail attributed the weak earnings to unusually mild storm activity, a challenging real estate market, and consumer uncertainty. Conclusion: The consumer engine is not off, focus on structural opportunities Consumer confidence has fallen to a three-year low, matching the levels during the 2022 bear market low, while signs of weakening in the labor market and stagnant job growth in recent months are spreading economic pressures to the population from multiple levels. But overall, looking at the comprehensive earnings report situation, the consumer sector has not given up. Current market expectations (such as the significantly fluctuating probability of a December rate cut) are swaying with each key earnings report, and it will be crucial to closely monitor changes in the labor market data, consumer confidence, and the upcoming performance of the holiday shopping season, as these will be key in verifying whether the consumption trend can continue. The American consumer engine is still running, but it has shown a trend of differentiation. The essential consumer giant Walmart Inc. remains strong, while discount retailers emphasizing cost-effectiveness are thriving. At the same time, retail businesses targeting the middle class and optional consumer types are becoming increasingly sluggish. In conclusion, in the current environment, there is an intensification of differentiation within the consumer sector, where essential consumer goods leaders and retailers emphasizing high value for money are more worth paying attention to, while companies targeting the middle segment and relying on discretionary spending should be approached with caution.