The US consumer will be in focus this week with a slew of retail earnings slated for release.
And while the economic story of 2023 has largely been about resilience and better-than-expected spending, it hasn't translated to higher retail stocks across the board.
"Americans are being selective with their spending, and while that can keep the economy afloat, it leads to a divergence among companies within the sector," eToro US investment analyst Callie Cox wrote in a blog post on Nov. 11.
For instance, service-based retail stocks have posted a median increase of 13.6% this year due to higher spending on travel, she noted, while automobile and parts stocks saw a median decline of 12.6%.
There's been another clear trend: Companies positioned in the Consumer Staples sector have fared better than those in the discretionary sector.
Walmart (WMT) stock has gained over 16% in 2023, outperforming the S&P 500 and seemingly benefiting from some consumers trading down as inflation puts pressure on household budgets, particularly in the grocery aisle.
Target (TGT), in contrast, has seen shares fall over 25%, given its higher dependence on discretionary spending. In July, Goldman Sachs estimated that 60% of Target's sales came from discretionary goods.
Investors will be greeted with a wide array of earnings this week. They started with Home Depot (HD) on Tuesday, which reported better-than-expected outcomes but offered a warning of "moderation" to come from consumers. But its stock rallied after the release amid a broader market rally on Tuesday.
Home Depot is followed by Target on Wednesday and Walmart on Thursday. Macy's (M), TJX Companies (TJX), and BJ's Wholesale (BJ) are also set to release results.
In a note previewing retail earnings, Morgan Stanley equity analyst Simeon Gutman wrote Walmart was well positioned for a "beat and raise" scenario. Meanwhile, Gutman doesn't see an inflection point to the upside to bring Target out of its sputter yet.
And when it comes to retailers whose results are tied to the housing market, Morgan Stanley is "leaning cautious" near term as it projects sales "softness" for Lowe's (LOW) to drive weaker-than-expected earnings in the third quarter while Home Depot could lead that part of the retail sector.
Across the "softlines" sector, which includes discretionary names like TJX, Macy's, Luluemon (LULU), and Nike (NKE), Evercore ISI retail analyst Michael Binetti noted that macro and industry signals are mixed "at best."
"Recession risk combined with sluggish demand today have created a negative sentiment overhang for the sector in recent months," Binetti wrote.
But as inventories improve and wallet share shifts away from the post-pandemic services dominance, Evercore is seeing some opportunity in the sector. Its five top picks are TJX, PVH (PVH), Lululemon, Ulta (ULTA), and Gap (GPS).
Evercore believes these companies have strong defensive characteristics and a clear track record of delivering outperformance.
Overall, the week will provide an update on the health of the US economy as some on Wall Street predict a slowdown driven by student loan repayments, declining excess savings, and higher borrowing costs.
"Given the consumer’s role in the economy, the direction from here likely has implications for the broader market," Evercore ISI senior managing director Julian Emanuel wrote in a research note on Nov. 12.
Josh Schafer is a reporter for Yahoo Finance.
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