Walmart profit woes hit retail stocks, deepen consumer spending concerns

Walmart shares tumbled over 8 percent, while shares of Amazon and Target were both down more than 4 percent. The S&P 500 consumer discretionary sector dropped 2.8 percent, logging the biggest drop among the sectors in the benchmark S&P 500, which was off about 1 percent.

Walmart's forecast marked the latest worrisome sign about an economy that some investors fear is headed for a recession.

"It’s a telltale sign that the average consumer is hurting," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "When you have America’s largest retailer guide down like this, you have to take it very seriously."

Walmart's outlook provided "a diagnostic look at the average American household," showing that consumers are digesting higher prices of food and essentials by lowering spending on discretionary categories such as apparel, according to Jefferies analysts.

The biggest private U.S. employer said its annual profit could fall by as much as 13 percent, adding that it would cut prices of clothing and general merchandise more aggressively to attract shoppers.

"Whether we are in or heading into an overall recession, it's going to feel like a recession in apparel," analysts at Citi Research said in a note.

JPMorgan analysts said in a note that the Walmart announcement "represents another data point of increasing consumer softness over the past two months ... as consumers buckle under persistent inflationary headwinds and drain reserves built up during Covid."

Walmart's downbeat forecast comes as the Federal Reserve meets on Tuesday and Wednesday. The U.S. central bank is balancing raising interest rates in the coming months to quell surging inflation with trying to avoid tipping the economy into a recession.

"I am sure the Fed is going to discuss all of this today and tomorrow," said Kim Forrest, chief investment officer at Bokeh Capital Partners. "We are seeing demand destruction which has to go into their calculus of how to raise rates."

Among other retail stocks on Tuesday, Best Buy dropped 4.4 percent, Costco fell 3.5 percent and Dollar Tree slumped 5.3 percent.

U.S.-listed shares of Shopify Inc slumped about 15 percent after the e-commerce firm said it would cut 10 percent of its workforce as it struggles with sales growth due to a post-pandemic slowdown in online shopping.

Big box retailer Target, which lowered quarterly profit margin forecast in June and said it would offer deeper discounts to reflect weak demand, will report results next month.

Bucking the trend, Coca-Cola Co raised its full-year revenue and profit forecasts on Tuesday as demand for sugary sodas stayed strong despite price increases. McDonald's Corp also reported quarterly comparable sales above market expectations even as expenses soared.