By Teresa Rivas
The K-shaped economy is sending mixed messages about the health of the consumer. That's complicating things for retail stocks.
The theory of the K-shaped economy -- in which wealthy Americans keep spending at a high-enough rate to make up for everyone else's belt-tightening -- was the theme of the latest earnings season. And it goes a long way toward explaining how consumer sentiment can be so low and yet retailers posted relatively solid results.
Still, shares of Walmart, Ulta, and others have been slumping lately, even after their latest results gave plenty of reasons for optimism. The stocks' counterintuitive performance reflects possibly growing skepticism about the health of the consumer -- and a lack of interest in non-tech stocks.
Yardeni Research Contributing Editor Jackie Doherty highlights several companies she thinks delivered strong results in their latest quarters: Dollar General attracted more six-figure households and boosted its earnings-per-share target, while Ulta Beauty delivered broad-based growth. RBC Capital Markets calls out Walmart and Ollie's Bargain Outlet Holdings "as among the best positioned to navigate the current environment."
Those companies seem like good contenders to successfully navigate the current backdrop, and yet all four stocks declined after reporting earnings -- and are trading lower than they were before their results. Looking at the sector overall, both the State Street SPDR S&P Retail exchange-traded fund and the State Street Consumer Discretionary Select Sector SPDR ETF are lower since the start of the year, even as the S&P 500 is up double digits in percent terms.
While spending by wealthier shoppers helps mask what's going on for the bulk of consumers, there are lingering worries about the sector overall in the face of inflation, especially elevated fuel prices.
Although gas prices have backed off a bit from their recent highs, they are still up more than 50% in the U.S. It would be wrong to assume there hasn't been an impact on consumers: The average number of gallons purchased at Walmart fuel stations fell below 10 for the first time since 2022 (the last major inflation spike), the company said in its most recent earnings call.
RBC Capital Markets analyst Steven Shemesh notes that he expects overall retail sales to edge down on a quarter-over-quarter basis once tax refunds begin to run out and no longer provide a spending cushion in the face of higher inflation.
"The low- and middle-income consumer remains the central pressure point, " noted RBC's Nik Modi in a Thursday report. "SNAP restrictions now active in 10 states, gas prices above $4/gallon, and persistent food inflation are compressing discretionary budgets in ways that are showing up directly in our companies' volumes." Modi's coverage universe includes staples stocks like Clorox and Coca-Cola.
And yet, it isn't all doom and gloom. That's because the top 20% of earners account for roughly 60% of consumer spending.
Even though the "K-shaped economy is bound to have varying degrees of impact across our coverage based on customer demographics, we expect limited overall economic impact" from lower-income cohorts spending less, says Shemesh.
Yardeni's Doherty makes much the same point, citing the continuing strength of the labor market. (Employment tends to be the biggest factor in terms of whether or not Americans seriously rein in their spending.) The fact that the job market is still strong flowed through to earnings, she notes.
She highlights that Dollar General, Signet Jewelers, and Ulta Beauty all raised per-share earnings estimates for the full year.
"Retailers selling everything from jewelry to makeup beat analysts' first-quarter earnings forecasts," she said. "Employed and driving increasingly fuel-efficient cars, consumers didn't retrench much in the face of last quarter's inflation and high gas prices."
For all the pain at the pump, energy remains a relatively low 2.4% of consumers' expenditures, up from 2% at the start of the year. When energy last spiked in 2022, that figure climbed to 3.4% and "even then did not trigger a recession," she notes.
So while there is reason to fret about the U.S. consumer, there might not be enough cause to abandon the retail stocks with strong competitive advantages. But markets don't always act on fundamentals.
In a world where investors are increasingly only interested in artificial intelligence and little else, even retail winners can be a hard sell: Better prospects still often translate into worse stock performance.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 04, 2026 16:43 ET (20:43 GMT)
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