Walmart's Warning

By Nicholas Jasinski  |  Monday, July 25

Markdowns. Stocks hung around around breakeven for most of the day, with the major indexes closing mixed. The S&P 500 finished up 0.1% and the Dow Jones Industrial Average added 0.3%. The Nasdaq Composite slipped 0.4%.

All eyes are on this week's Federal Reserve policy meeting, with a less-than-clear next move in store from the central bank (more on that below). A profit warning from Walmart after the market closed this afternoon sets up stocks for a potentially tough day tomorrow.

Energy stocks were the biggest gainers in the S&P 500 today, boosted by a rise in oil and gas prices. Russia's Gazprom said this morning that it would halve gas exports through the Nord Stream pipeline to Germany starting Wednesday, to just 20% of full capacity. The state-owned energy company said that the supply reduction was due to a turbine problem and blamed Western sanctions, while European officials said Russia is retaliating for the West’s support for Ukraine.

The main European natural gas benchmark surged almost 11% today, and is up close to 15% in two trading days. The U.S. price of natural gas jumped more than 5% today, stretching its two-day rally to 10%. European and U.S. oil prices both rose roughly 2%.

S&P 500 energy stocks rose 3.7%. Avi Salzman has more here.

The biggest news on the earnings front today came after the market closed, when Walmart warned that inflation was eating into consumers' purchasing power and said that the company would earn less this year than management had previously forecast. 

The retail giant now expects that its operating income will be down 11% to 13% this fiscal year, which ends in January 2023. In mid May, management said that operating income would be flat year over year. That's a big swing.

“The increasing levels of food and fuel inflation are affecting how customers spend, and while we’ve made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars," said Walmart CEO Doug McMillon in a statement this evening. "We’re now anticipating more pressure on general merchandise in the back half; however, we’re encouraged by the start we’re seeing on school supplies in Walmart U.S.”

In short, Walmart has been needing to discount its products more and more in order to clear inventory. That's bad for profit margins.

Teresa Rivas has more on Walmart's earnings warning here. The retail giant's stock dropped more than 9% in after-hours trading today. The news weighed on other retailers, as well. Target stock lost 5% in late trading, Home Depot fell 2%, Best Buy declined 4%, and Dollar General slid close to 4%. Amazon.com was off nearly 4%.

S&P 500 futures were pointing to a decline of 0.5% at tomorrow's open.

Walmart is scheduled to report its fiscal second quarter results—covering the May-June-July period—on Aug. 16.

As for the broader S&P 500, as earnings season has progressed Wall Street analysts have been reducing their forecasts for earnings in the second half of 2022 and for 2023.

Here's Yardeni Research president Ed Yardeni writing to clients today:

They haven’t cut their estimates by much, so far, but they have done so enough to flatten S&P 500 forward earnings after it rose to a record high four weeks ago...In the soft-landing scenario, the S&P 500 would move mostly sideways over the rest of this year, assuming—as we do—that the index’s forward P/E bottomed at 15.3 on June 16. Of course, in a hard-landing scenario, the bear market would resume, knocking the S&P 500 below its June 16 low as both forward earnings and the forward P/E head lower.

Up next on the earnings calendar tomorrow are Alphabet, Microsoft, Visa, UPS, McDonald’s, General Motors, Coca-Cola, General Electric and a whole lot more.

DJIA: +0.28% to 31,990.04
S&P 500: +0.13% to 3,966.84
Nasdaq: -0.43% to 11,782.67

The Hot Stock: SVB Financial +8.3%
The Biggest Loser: Newmont -13.2%

Best Sector: Energy +3.7%
Worst Sector: Consumer Discretionary -0.9%