U.S. stocks extended losses Tuesday afternoon after Walmart cut its earnings forecast, sending other retail shares lower and adding to concern that consumer spending might not be strong enough to keep the U.S. out of a recession.
The Dow Jones Industrial Average fell by 247 points, or 0.7%. The S&P 500 lost 1.3% and the Nasdaq Composite declined 2%.
Walmart cut its quarterly and full-year profit estimates because of rising food inflation. This alarmed investors who deliberated the implications for other retail stocks. The big-box retailer said higher prices are spurring consumers to pull back on general merchandise spending, particularly in apparel.
Walmart plunged 8% Tuesday and dragged other retailers with it. Kohl’s and Target dropped 7% and 5%, respectively. Apparel companies were hit hard, with Macy’s down almost 6% and Nordstrom, Ross and TJX Companies lower by about 4% each. The SPDR S&P Retail ETF was lost almost 4%.
“The most important thing from the Walmart announcement is how inflation is changing what people buy,” said Robert Cantwell, portfolio manager at Upholdings. “Food now makes up a bigger share of individuals’ budgets, but overall spending still generally remains intact.”
The retail carnage bled into e-commerce shares. Shopify tumbled 15% after the provider of payments software for online businesses announced it’s laying off about 10% of its global workforce, citing a pullback in online spending and saying it misjudged how long the pandemic-fueled e-commerce boom would last. The company will report its earnings Wednesday. Rival Amazon was also down by more than 5%.
Inflation has also changed the cost of production for companies like General Motors. Its shares fell 2.8% after the company missed earnings estimates, blaming supply chain disruptions that forced factory shutdowns and led it to ship fewer vehicles than expected. Its competitor Ford is scheduled to report results after the bell.
UPS shares slid 4.3% after the shipping giant reported declines in its international and supply chain businesses.
On the flip side, Coca-Cola shares rose 2.2% after the beverage giant topped earnings and revenue expectations, citing a sales volume recovery from the pandemic and higher pricing.
Shares of McDonald’s added 3% following mixed second-quarter results, in which net sales were hurt in part by the closure of locations in Russia and Ukraine, but international growth elsewhere fueled a rise same-store sales.
Industrial stocks were earnings winners too. Shares of 3M rose 6% after beating earnings and revenue estimates and announcing plans to spin its health care business into a separate publicly traded company. General Electric posted better-than-expected results citing recovery in the aviation industry that boosted its jet engine business. Its shares gained almost 7%.
Traders are also bracing for an onslaught of mega-cap tech earnings and economic data this week, as well as the outcome of the Federal Reserve meeting, that will help Wall Street direct its expectations for the rest of the year.
“There is this moderating of earnings expectations,” said Stephanie Lang, chief investment officer of Homrich Berg. “The overall corporate sentiment seems to be declining, there is a lot of cautionary commentary around inflation, the dollar”
“As the Fed continues on its trajectory with its main goal to weaken demand for goods and services, that will translate into a weaker top line – if they are able to get inflation under control and temper that demand,” she added. “That’s something we would be concerned about for the second half of this year.”
Fed meeting and the market’s expectations
On Tuesday, the Federal Reserve commenced its two-day policy meeting. Traders are widely expecting a three-quarter percentage point hike and will be looking for clues on the future interest rate path and what it could mean for equity market pricing.
“The bottom line is the Fed, no matter how you cut it, is going to quickly move to that restrictive stance that will have a toll on the economy,” Lang said. “It’s going to get there quickly enough, whether it’s an extra 25 basis points next time versus a month later. Within the next six months we’re going to be in a financially restrictive environment.”