Are Oil Prices Hurting Consumers? Big Retail Earnings Are Barometer This Week

Earnings reports this week will be particularly important – not only with the impact of Nvidia (NVDA), which reports after Wednesday’s close but also because several major retailers are likely to provide a window into the health of the American consumer.

Home Depot (HD) reported earnings that beat expectations on the top and bottom line Tuesday morning, but shares are almost unchanged. The home improvement retailer’s CEO Ted Decker noted “greater consumer uncertainty and housing affordability pressure” and that spending on home projects is delayed because of weaker consumer confidence and a slow housing market, among other factors. Tomorrow Lowe’s (LOW), TJX Companies (TJX), and Target (TGT), while Thursday includes Walmart (WMT) and Ross Stores (ROST).

The U.S.-Iran war and closure of the critically important maritime petroleum shipping route of the Strait of Hormuz have meant sharply higher oil prices, pain at the pump for consumers and unexpected headwinds for businesses and supply chains. The advent of artificial intelligence also poses severe disruption to many industries, including retailers, so investors likely will be listening closely to this subject as well.

Walmart executives earlier this week told UBS analysts that higher gasoline prices could start to have significant effects on consumer spending, according to news reports. The Walmart representatives said when gas is between $4.50 to $5 per gallon, consumers cut spending, while at above $5, the economy would see a “material drawback” in demand. Prices crept above a critical threshold to $4.533 as of Tuesday, according to AAA.

This challenging environment may be taking its toll, but the breakdown has not happened yet in retail. The State Street S&P Retail ETF (XRT) is at an inflection point, with price compressing into a relatively large symmetrical triangle-type pattern characterized by a downtrend off the highs of 91.65 on Jan. 22 and an uptrend from a notable low near 77 from Aug. 1. The recent activity has seen a much sharper downside move, with price plunging about -11.2% since a high of 89.01on Apr. 21.

The XRT is now hanging above its relative lows from late April near 78. Price dipped below this level only a handful of times since its initial Jul. 1 breakout, so a further downside move would be noteworthy. The expected move info based on the options market projects a possible range of +/-6.1 (7.6%) by the Jul. 17 monthly expiration, which suggests traders are looking for price to hold near the 52-week lows just below 74.

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