Subpar profit outlooks from two of the largest U.S. retailers fueled a broad decline in stock prices Tuesday, as investors increasingly heed the calls that this year’s rally may be little more than a mirage.
The Dow Jones Industrial Average fell 400 points, or 1.2%, dragged down by Home Depot and Walmart’s respective 5.1% and 1.3% drops after each company reported earnings before the market open.
Even though Home Depot topped consensus profit estimates for its most recent quarter and narrowly missed on sales, while Walmart beat forecasts on the top and bottom lines, Wall Street paid far closer attention to what the retailers said about their profitability moving forward, with Walmart sharing tepid profit guidance for 2023 and Home Depot announcing it will spend an additional $1 billion in wages for hourly brick-and-mortar workers as the company grapples with a tight labor market.
Home Depot “is going to have a margin problem” in coming months, Oanda analyst Ed Moya wrote in a Tuesday note to clients, adding that “rough waters are clearly ahead” for Walmart, too.
The S&P 500 and tech-heavy Nasdaq also slipped Tuesday, posting 1.1% and 1.3% respective declines.
Tuesday’s gains eat into each major index’s year-to-date gains as the market increasingly bakes in slumping corporate earnings and shies away from optimism that the Federal Reserve will stop raising interest rates sooner than expected.
“All the hoopla and excitement about the YTD rally [is] misplaced,” Morgan Stanley’s Michael Wilson wrote in a tuesday note, adding the surge was “pure FOMO at its best.”
The Dow’s 400-point drop Tuesday was its third-worst day of 2023. The index’s 0.8% gain year-to-date trails the S&P and Nasdaq this year after the Dow far outperformed the other markers in 2022.
“Markets are admitting the Fed may not be close to done,” Sevens Report strategist Tom Essaye wrote Tuesday, comparing the latest rally to last summer’s surge that proved to be nothing more than a dead cat bounce.
Goldman Sachs economists led by Jan Hatzius wrote Sunday they “are not particularly concerned” about if recent corporate profit guidance may mean a recession is increasingly likely, noting it’s typical for companies reporting earnings early in the year “to offer full-year guidance that is less optimistic than the standing forecasts of equity analysts.”
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