Walmart hit record highs. Will other companies follow?

Market Recap

• Equity markets were mostly higher this week, as the closely-watched U.S. Consumer Price Index (CPI) report didn’t seriously disappoint—it certainly wasn’t great, but we’ve been conditioned to deal with bad inflation prints.

• The S&P 500 rose 1.5%, while the tech-heavy Nasdaq led with a 2.1% advance. The gains saw the S&P 500 reclaim record levels, while the Dow pushed above 40,000.

• Canadian stocks lagged, up 0.7% on the week as declines in Energy and Industrials offset gains in Materials and banks.

Walmart

Last week, Walmart’s earnings beat caused its stock to surge to all-time highs. What is this telling us about the consumer? The company’s strong earnings demonstrate that Consumer Staples is where consumers are spending their money more and more as they look for bang for their buck. Walmart tends to deliver on that front, so an earnings uptick is no surprise. Our thesis is that both high-end and low-end retail sales are doing well because the consumer remains fairly resilient, but the middle is weakening as that segment of consumers trades down. In our view, caution is warranted when it comes to owning companies in that middle segment of the retail market. The stock price movement highlights that investors are evaluating companies from the standpoints of valuation and the current economic environment. Through those lenses, Walmart looks like a company with capabilities that mesh well with the current state of the consumer. Looking ahead, we’ll be closely monitoring results from Target and other companies within the Consumer Staples sector. That will provide clarity on whether Walmart’s earnings were a company-specific story or part of a broader trend as we suspect.

Bottom Line: We think Walmart’s strong earnings are an indication that the consumer continues to shift in terms of its spending.

Inflation

Interest rate expectations have resembled a tennis match lately: back and forth, back and forth. Six months ago, people were talking about as many as six rate cuts in 2024; within the last couple of months, speculation turned back to potential rate hikes. After the recent U.S. inflation data for April showed signs of cooling, renewed questions about accelerating the schedule for cuts have popped up. Our evaluation is that we’re back to the stage where no one wants to raise rates; it would take an extraordinary amount of data to persuade the U.S. Federal Reserve (Fed) to go higher. In order to cut, all the Fed requires is greater confidence that inflation will not spike back up after they act. While much is out of the Fed’s control, one thing they can do is manage expectations. For instance, when they do decide to cut, we expect them to emphasize that the decision does not mean that cuts will be coming at every meeting, and that future decisions will remain data dependent.

Bottom Line: It is not a question of if interest rates will ease—it’s a matter of when.

Meme Stocks

Meme stocks—equities that go “viral” due to interest from online communities, and whose performance often isn’t tied to actual results or potential—are back in the news. GameStop and AMC were among the names that surged last week on interest from retail traders before tapering off. What caused this resurgence? For starters, the S&P 500, Nasdaq, and Dow Jones all hit record highs last week. That kind of performance is an excellent sign given high interest rates, and sticky inflation. It tells people that the economy and consumer are relatively resilient. It’s that optimism that likely drove the recent meme stock rebound. That said, this surge was quite different than in the past because it fizzled out quickly—it appeared to be a quick trade rather than a concerted effort to push shorts into trouble, as had been the case in previous meme stock cycles. There were also fewer shorts out there than there were a few years ago because of what had happened to these stocks previously. These changes to the market environment seemed to make it more difficult for the surge to last.

Bottom Line: Meme stocks are an interesting story, but in this case, the surge seemed to barely get off the ground.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Fed’s Last Stand: A Solitary Rate Cut Expected for 2024.