What do Walmart's and Target’s results say about the US consumer?

US consumers are continuing to spend, but recent results from major retailers suggest they are becoming more selective about where and how they spend their money.

Walmart's sharp stock decline following its latest earnings report has added to concerns that higher prices, elevated gasoline costs, and economic uncertainty are increasingly influencing household spending.

The shift is particularly important because Walmart is often viewed as a bellwether for the US consumer.

While shoppers continue to visit stores, recent results from Walmart, Target and Home Depot indicate that customers are making smaller and more deliberate purchases.

Walmart stock falls despite profit beat

Walmart shares fell 9.2% on Thursday after investors looked beyond the retailer's latest profit beat and focused on its weaker third-quarter outlook and signs of pressure on consumers.

Bryan Hayes, a strategist at Zacks Investment Research, told MarketWatch that the market reaction suggested investors believe current consumer spending may be close to its peak, particularly given the valuations previously assigned to major retailers.

Walmart's results showed that customers were still visiting its stores, but spending less per trip.

US store traffic increased 1.5%, while spending per trip rose 1.1%. At Sam's Club, visits increased 7%, but spending per visit declined 2.5%.

Alexander Lis, chief investment officer at Social Discovery Ventures, told Invezz that consumers are becoming increasingly price-sensitive, forcing retailers to cut prices to attract and retain shoppers.

Lis pointed to Walmart's use of 11,000 price rollbacks in the second quarter, up from about 7,000 in the first quarter, as evidence that consumers are becoming more cautious.

Hayes described this as a more deliberate consumer rather than necessarily a weak one. He said shoppers are making more frequent, smaller, and more considered purchases as they seek value.

The distinction is important because Walmart has traditionally benefited when consumers become more cautious.

Lower-income households often turn to the retailer for cheaper products, while higher-income shoppers can also use Walmart to reduce household expenses.

Lis noted that Walmart is also gaining market share among higher-income consumers in discretionary categories such as fashion, suggesting that wealthier households are increasingly choosing cheaper alternatives. This points to a broader "trade down" trend rather than weakness being confined to lower-income consumers.

That makes the company's first comparable-sales decline in six years particularly notable, even though Walmart attributed the decline partly to temporary pricing pressure in its pharmacy business.

Retailers point to more cautious shoppers

Walmart is not the only major retailer seeing signs of changing consumer behavior.

At Target, foot traffic increased 3.6% in the second quarter, but spending per trip remained flat.

The retailer has been working to attract customers with lower prices, while management said clothing and home goods remain areas requiring significant improvement.

Target CEO Michael Fiddelke said the company still has "much more work to do" to win back customers who have moved toward competitors offering deeper discounts.

Home Depot has also seen consumers continue to spend, but increasingly on smaller projects.

Plumbing, kitchen and gardening categories performed better, while demand for larger home-improvement projects remained under pressure.

Home Depot CFO Richard McPhail said consumer uncertainty and housing affordability were continuing to weigh on larger projects. Rival Lowe's similarly pointed to persistent macroeconomic pressures and softer discretionary spending.

The pattern suggests households are prioritizing necessities and lower-cost purchases while delaying larger expenditures.

Higher costs add pressure

The shift in spending comes as consumers face elevated costs for everyday necessities.

US gasoline prices have been around $4 a gallon, according to AAA, while higher energy costs linked to the artificial-intelligence boom have also contributed to rising costs for some goods, including electronics.

Walmart CFO John David Rainey said the company was facing "arguably a softer consumer environment than in February." He also noted that higher fuel prices appeared to influence consumer decisions.

Rainey said June provided clearer evidence of shoppers making trade-offs as gasoline prices moved above $4 a gallon. Walmart has responded by placing greater emphasis on lower prices.

The company's strategy is aimed at protecting market share by making products more affordable as consumers become more price-sensitive.

Retail sales and jobs add to concerns

Recent economic data have also pointed toward more cautious household spending.

US retail sales fell 0.6% in July, marking the first decline in almost a year and significantly missing expectations for 0.1% growth.

The decline was partly influenced by cheaper fuel and a slowdown following Amazon's summer sales activity, but analysts also pointed to weaker discretionary spending.

Brian Mulberry, chief market strategist at Zacks, said the figures indicated that consumers were easing spending on more expensive purchases such as automobiles, electronics and appliances.

He also pointed to the continued divide between asset owners and consumers without significant assets.

Other indicators have added to the concerns.

The University of Michigan's consumer sentiment index declined in August for the first time in three months, while the July jobs report showed the US economy lost 23,000 nonfarm payrolls, compared with expectations for an increase of 80,000.

Fed faces a difficult policy backdrop

The weakening consumer comes as investors continue to assess the Federal Reserve's interest-rate path.

Lis said that if the softening consumer trend continues, it could remove rate hikes from consideration. "But given the persistent inflation, it would be hard for Fed to support the economy as well. So it is hard to anticipate a V-shaped this time", he added.

Markets are still pricing in at least one rate hike by year-end, but signs of softer consumer activity could complicate the case for tighter monetary policy.

At the same time, inflation remains a concern. Persistent geopolitical tensions, particularly the conflict involving Iran, could push energy prices higher and create additional inflationary pressure.

That could leave policymakers facing a difficult balance between containing inflation and avoiding additional pressure on an already more cautious consumer.

For retailers, the coming months will provide further evidence of whether the current slowdown is temporary or represents a broader change in household spending patterns.

Results from Costco and smaller specialty retailers are expected to offer additional clues.

Walmart's sharp stock decline shows that investors are increasingly sensitive to even modest signs of weakening demand from the US consumer.

With shoppers still spending but becoming more selective, the strength of household demand could become an increasingly important factor for both retailers and the Federal Reserve.