To The Moon

$Wal-Mart(WMT)$

A Storm is Coming

A storm is brewing in the American economy, and the warning signs are coming from both Wall Street and Walmart. Today we'll discuss how Walmart, once a symbol of affordability in America, is now sounding the alarm for the economy. What did they say that has everyone worried? As you'll soon see, the truth is even more concerning than you might think. Plus, you could be missing out on life-changing profits.

Walmart’s Troubling Forecast

Now, let's dive into today’s story. For decades, Walmart has been a hallmark of American affordability, but now it’s signaling economic trouble ahead. Recently, Walmart lowered its profit forecast due to slowing growth, which is something we’ve been warning about. We’ve highlighted how inflation has been running too high, and income growth hasn’t kept up, which is driving demand down. Walmart is now warning of a storm on the horizon for the American economy. During an analyst call, John Rainey, the company’s Chief Financial Officer, said their guidance was in line with previous years, but also mentioned there are uncertainties surrounding consumer behavior and global economic and geopolitical conditions. It’s clear he’s referring to geopolitical issues like the impact of terrorism, but when he talks about consumer uncertainty, that’s a big red flag. If the economy were truly experiencing a soft landing, we’d expect to see higher demand, more foot traffic, and bigger orders. Instead, he’s indicating that things are getting worse for U.S. consumers—something we’ve been saying for a while now.

Sales Growth Forecast and Concerns

Looking ahead, Walmart is forecasting net sales growth of only 3 to 4%, which is not inflation-adjusted. After accounting for inflation, that number falls to under 2%, a troubling sign for Walmart. What’s even more concerning is that we haven’t yet heard from other retailers. If Walmart is already struggling, the data from other companies could reveal a much worse picture for the consumer. This is lower than the 5% growth Walmart saw in the previous fiscal quarter, which makes sense since the economy was in better shape then. Now we’re seeing the reality: income growth is stagnant, the labor market is weakening, and consumer demand is falling. For retailers, that’s the worst possible news.

The CPI and Real Retail Sales Trend

Impact of Tariffs on Walmart and Consumer Behavior

Let’s take a look at the Consumer Price Index (CPI) compared to real retail sales. In the late 1990s, when CPI was rising rapidly, income growth slowed, and that immediately impacted real retail sales. The same thing happened in 2006: inflation increased while wages didn’t keep pace, leading consumers to cut back on spending and contributing to the global financial crisis. Fast forward to today, and we’re seeing nearly three years of negative real retail sales. Many believed the end of last year marked a turnaround, but we argued that it was mostly driven by consumers trying to beat the tariffs. Now, the manufacturing sector is showing signs of inflation, and we’re hearing reports from China about the possibility of currency devaluation, which could drive inflation even higher. All of this points to rising prices, which means real retail sales will likely continue to decline. This is exactly what Walmart is warning us about.

Changes in Consumer Spending Patterns

Rainey also mentioned that their guidance doesn’t include the potential impact of tariffs, given the unpredictability of these levies. Walmart imports food from Mexico and general merchandise products like microwaves from China. To keep prices low, the company will rely on private label brands. This focus on house brands indicates that consumers are trading down, as they can no longer afford higher-priced goods. Walmart is telling us loud and clear: American households are under financial strain and cutting back fast.

While Walmart has traditionally benefited from consumers prioritizing essentials like groceries, it’s now seeing growth mainly from households earning over $100,000 a year. This suggests that lower-income consumers can’t keep up with rising costs for rent, energy, and food, and are cutting back on discretionary spending. Meanwhile, higher-income households are also feeling the pinch and turning to Walmart for savings. Interestingly, many of these consumers are choosing to order for pickup or via the app, all in an effort to save a few bucks.

Weakening Consumer Demand and Retail Slump

To wrap up, Rainey’s comments on consumer behavior are telling. He mentions that spending is steady, but not improving. This isn’t a rebound—it’s a sign that consumer demand is weakening. As we look at income data, we see that wages have flattened out, and inflation is likely to rise, making it even harder for consumers to afford the things they need. Retailers are bracing for a downturn, and Walmart, as the first big-box retailer to report after the holiday season, saw its stock drop 6%. These results followed data showing a significant slump in retail sales, which we had already predicted.

The reality is clear: a storm is coming for the American economy, and it’s time to take action. It was quite clear in hindsight that consumers anticipated the tariffs, and they rushed to buy in advance. Now, however, their behavior is shifting. They're focusing on paying down credit card debt and increasing their savings, which is taking a significant toll on retail sales. This shift is also affecting the equity markets. When we compare total incomes, represented in blue, against the NASDAQ 100, we see a pattern emerging. As income growth slows, stock prices follow suit. This is what we saw during the dot-com bubble and the global financial crisis—when inflation tightens household budgets, there's less disposable income to invest, and many investors end up selling their holdings just to make ends meet.

Risks in the Stock Market and Manufacturing Sector

This cycle repeated itself in 2015–2016, and now, as we see income growth plateau, the stock market is at risk of following suit. Walmart’s warning about declining demand directly impacts the manufacturing sector, which will likely face fewer new orders, leading to job cuts. This will eventually trickle down to the services sector with a typical three-month delay. Consumers are about to face more sticker shock if tariffs take effect, compounded by insurance price hikes in California, rising gas prices, and sky-high grocery costs. We're approaching a tipping point, where consumers are finding it harder to keep up with inflation, especially when their incomes are stagnant. This will inevitably affect their discretionary spending, leading to more job losses.

Jobless Claims and Economic Slowdown

Jobless claims are creeping up again, signaling a concerning trend. While initial claims increased by a modest 5,000 to 219,000, the bigger issue lies with continued claims, which reflect the number of people still receiving unemployment benefits. This number is steadily rising and is a strong indicator that the economy is not creating enough new jobs. When people remain unemployed for longer, their spending drops, leading to a further slowdown in the economy. The trend here is clear—when continued claims rise, initial claims often follow suit, which we've seen repeatedly throughout history during major economic downturns.

The Federal Reserve’s Response and Potential Recession

Even though initial jobless claims are lower than expected for now, it’s only a matter of time before the situation worsens. The Federal Reserve is currently fixated on inflation and, despite these mounting challenges, seems hesitant to adjust monetary policy. But when the labor market begins to unravel and the economic downturn worsens, the Fed will eventually have to change course. By then, it will likely be too late, and the damage will already be done. High input costs, driven by potential tariffs, are expected to be passed onto consumers, but this may not work, as many people simply can't afford to absorb the higher prices. This will lead to stagnant inventory on store shelves, fewer new orders, layoffs in the manufacturing sector, and ultimately, the services sector will also feel the pressure.

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Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.