(Bloomberg) -- Earnings from a string of household names are stoking concern over the resilience of American consumers and stocks tied to their spending, raising the stakes for results from the nation’s largest retailers.

Starbucks Corp., McDonald’s Corp. and Amazon.com Inc. reported results last week that sent some alarming signals around demand from their customers. The announcements fueled doubts around how consumers are holding up as the Federal Reserve signals plans to keep interest rates high for months to come to tame sticky inflation.

Against a backdrop of slowing job growth and slumping consumer confidence, investors will now turn their focus to the earnings of retailing giants like Walmart Inc. and Target Corp. to gauge shoppers’ spending habits. Both companies report over the next couple weeks, with the potential to sway expectations for economic growth and retail shares, which are trailing the broader market in 2024.

“The big takeaway from this earnings season is that many of the companies are now getting more cautionary on the future quarters, and the growth prospects and the outlook for their businesses.” said Michael Arone, chief investment strategist at State Street Global Advisors for the US SPDR ETF business. “This is a concern for those reports we haven’t seen yet, particularly from the likes of a Walmart or a Target,” which he called “proxies for consumer strength.”

Last week, Starbucks posted its first quarterly sales decline since 2020, and the coffee chain lowered its annual revenue outlook. McDonald’s, meanwhile, delivered US comparable-sales growth that trailed Wall Street’s expectations. And Amazon’s e-commerce business reported weaker-than-expected sales as the company saw shoppers trade down to save money.

On Deck

With those results in mind, Wall Street is eager to get updates from retail executives, as consumer spending powers roughly two-thirds of the US economy. Home Depot Inc. and Walmart kick off first-quarter retail earnings next week, with results from Target, TJX Cos. and Costco Wholesale Corp. to follow later this month. 

If retailers like Walmart or Target “continue to suggest that consumers are retrenching or not spending as aggressively on higher-margin products, that is a concern,” said Arone at State Street.

He has a neutral view on the consumer-discretionary and staples sectors, seeing better opportunities in technology, communication services and industrials.

Underscoring the risk of disappointing investors, Starbucks shares posted their biggest decline since March 2020 in the wake of the company’s latest earnings. 

Analysts tracked by Bloomberg expect Walmart, the world’s largest retailer, to report the slowest sales growth in three years for the 12 months through January 2025. They’re more optimistic on earnings, anticipating the company will post stronger profit growth than the previous fiscal year.

Spending Weakness

John Zolidis, founder of consumer-focused investment adviser Quo Vadis Capital, expects to see weakness in discretionary spending as retailers report first-quarter results. One headwind, he said, is that there’s no major occasion straight ahead, like back-to-school, to bring shoppers out. 

“If you’re a consumer and you’re watching what you’re spending, this is just a period you don’t go to stores,” he said. 

His top picks include discount retailers Dollar Tree Inc. and Five Below Inc., which he says should benefit as consumers try to save. The shares have trailed the broader market this year. He also likes Target, which he said has room to improve margins. Meanwhile, he sees Walmart shares as fully valued at current levels. 

“Consumer cracks are emerging,” especially among low-income households, said Bank of America Corp.’s Savita Subramanian. The bank’s head of US equity and quantitative strategy highlighted in a May 6 note that phrases like “value” and “trade-down” have been used frequently on recent earnings calls.

McDonald’s said last week that lower-income customers especially are looking for value. Tyson Foods Inc. shares plunged on Monday after the company said inflation has eroded consumers’ appetite for some of its offerings.

“Consumption by the low-income consumer contributes only about 10% to total personal consumption expenditures, so these initial signs of cracks do not worry me about the broader economy,” said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. “If this spreads to the middle-income and higher segments, then that will be different.”

--With assistance from Esha Dey and Michael Msika.

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