The market was treading water on Monday as it awaited significant earnings news and the Fed interest rate decision when Walmart (WMT) suddenly issued a shocking after-hours warning.
Walmart had just issued a very poor earnings report and a warning in mid-May, so it was a surprise that even more bad news was disseminated so quickly. Economic conditions have been changing very quickly, and Walmart reflects the transition.
In February, Walmart was expecting growth in earnings per share of around 5% to 6%. On Monday night, the EPS projection was changed to a decline of 10% to 12%. The thing that is particularly interesting is revenue is projected to increase due to inflation that is increasing prices, but margins are under heavy pressure. Shoppers are spending more money on food and gas, which have much lower profit margins for retail. This is hurting areas such as apparel, where there is now a glut of inventory that must be marked down.
This warning from Walmart raises a couple key questions at this point. Will it lower expectations for stocks in the technology sector that are reporting? And is this shift in consumer behavior that is happening so quickly at Walmart also impacting stocks such as Microsoft (MSFT) and Apple (AAPL) ?
Another issue is whether the Walmart warning is indicating that a recession is inevitable. There still are many folks who say there is no real economic issue due to strong levels of employment, but can that continue when there is such trouble in the retail sector?
If the market is embracing the inevitability of a recession, will that push the Fed to be less hawkish? Will this poor report from Walmart cause the Fed to temper its hawkishness a small amount?
We have a chaotic brew of news that is hitting and the market is going to have difficulty sorting it all out. My game plan is to stay extremely cautious and not be in any big rush to put precious capital to work. I mainly will be focusing on short-term trades at this point.