Will Walmart’s Results Be the Last Nail in the Coffin?

Walmart (NYSE: WMT) is due to report second-quarter financial results before the opening bell on August 15th. Analysts will be closely watching these results for any indication of where management sees the business going in the second half of 2019. The first half of 2019 has been relatively smooth with analysts expecting earnings pre-share of $1.21 in the second quarter, following 1Q results of $1.13 per share, which beat analysts’ expectations by 10.78%. However, the second half of 2019 could get darker from pressure on consumer sentiment and volatility in the market.

Consumption makes up around 70% of US economic activity, so Walmart’s results matter because they reflect US commercial activity as a whole. If the forward guidance in these results on the 15th is inadequate, investors should expect the market to trade lower, especially in the retail sector. (For more see, Are Consumer Stocks Signalling a Market Top?) Last week the market was on a bit of a roller coaster ride but managed to claw back some of the losses later in the week. Investors are under pressure from the lack of progress in the US and Chinese trade talks, which some fear could lead to an economic recession. One indicator of this is the yield difference between 10-year and 2-year US treasury notes, which reached a low of just ten basis points last week.

In the meantime, investors seem to be running to safer assets like gold, which traded over $1500 per ounce last week. (For more see, Why Investors Are Rushing to Gold). Gold hasn’t sold at that price since 2013 and reflects a general sense of fear in the market. The rhetoric coming from the White House is adding to the market’s nervousness, with President Trump using the word “incompetent” when Tweeting about the US Federal Reserve Bank. The President is putting pressure on the Fed to cut interest rates more aggressively, but the Fed fears over-stimulating the economy and stoking inflation, which could hurt consumers in the long run.

Lower interest rates would also weaken the US dollar because investors reduce demand for currencies that offer investment opportunities with lower returns and increase demand for investments where yields are better. A weaker dollar would help exports by making them cheaper and counter a move by China last week to weaken its money, but it can also cause inflation to rise because the cost of importing goods from abroad rises with a weaker dollar.

Bottom Line

Consumer sentiment is fragile, so investors will closely watch Walmart’s results to get a sense of what might happen in the second half of the financial year. If Walmart puts on a brave face and plays down things like trade tensions, then investors should expect a favourable reaction from the market. If there are any surprises in the forward guidance, or 2Q results are weaker than analysts’ expectations, the market reaction could be severe.

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.