The latest economic news provides a fascinating snapshot of the current state of the US economy, and Walmart’s recent financial report offers a valuable lens through which to view it.
Walmart’s CFO, John David Rainey, highlighted a key trend: consumers are becoming more discerning and focused on essential purchases over discretionary items. While this suggests a shift away from reckless spending, it doesn’t indicate a collapse in consumer health. This aligns with a broader economic picture of cooling growth, characterized by a balanced labor market and healthy consumer finances, despite some normalization in household savings and debt delinquencies.
The continued willingness and ability of consumers to spend is significant, as personal consumption constitutes a substantial 68% of GDP. With consumers spending, the economy is likely to continue growing. This is reflected in Walmart’s Q2 results, which show healthy 4.8% year-over-year net sales growth fueled by robust U.S. same-store sales growth. This positive trend has prompted the company to increase its full-year guidance, projecting 3.75% to 4.75% growth in fiscal 2025.
Furthermore, national retail sales data for July showcases a similar trend, with a 2.7% year-over-year increase to a record $709.7 billion. While retail sales growth has plateaued in recent months, it’s important to remember that these figures are still at record levels. While a cooling economy might seem concerning, it’s crucial to recognize that this slowdown is not necessarily negative. Instead, it indicates a ‘goldilocks’ scenario where economic activity continues to grow, while inflation remains controlled. This environment is conducive to strong corporate earnings, as companies can leverage their operations to achieve robust earnings growth despite modest sales growth.
This is a key takeaway for investors. While the stock market is not the economy, the stock market can outperform the economy. With companies demonstrating an ability to translate modest sales growth into strong earnings growth, the potential for continued stock market gains remains strong, even as the economy cools.
