Dow sheds more than 200 points after Walmart profit warning, S&P 500 falls 1%

U.S. stocks fell Tuesday after Walmart cut its earnings forecast, sending other retail shares lower and adding to concern that consumer spending might not be strong enough to keep the U.S. out of a recession.

The Dow Jones Industrial Average fell 228.50 points, or 0.71%, to 31,761.54. The S&P 500 retreated by 1.15% to 3,921.05. The Nasdaq Composite declined about 1.87% to 11,562.57. All of the major averages were still on pace for their best month of 2022.

Walmart cut its quarterly and full-year profit estimates because of rising food inflation. This alarmed investors who deliberated the implications for other retail stocks. The big-box retailer said higher prices are spurring consumers to pull back on general merchandise spending, particularly in apparel.

Walmart plunged 7.6% Tuesday and dragged other retailers with it. Kohl’s and Target dropped 9.1% and 3.6%, respectively. Among apparel companies, Macy’s was among the hardest hit, down 7.2%. Nordstrom and Ross each lost more than 5%, and TJX Companies shed about 4.2%. The SPDR S&P Retail ETF fell nearly 4.2%.

“The most important thing from the Walmart announcement is how inflation is changing what people buy,” said Robert Cantwell, portfolio manager at Upholdings. “Food now makes up a bigger share of individuals’ budgets, but overall spending still generally remains intact.”

The retail turmoil bled into e-commerce stocks. Shopify tumbled about 14.1% after the payments provider announced it’s laying off about 10% of its global workforce, citing a pullback in online spending and saying it misjudged how long the pandemic-fueled e-commerce boom would last. The company will report its earnings Wednesday.

Amazon fell 5.2%. Square parent Block and PayPal, both of which operate major merchant services businesses, dropped roughly 7.1% and 5.7%, respectively.

Inflation has also changed the cost of production for companies like General Motors. Its shares fell 3.4% after the company missed earnings estimates, blaming supply chain disruptions that forced factory shutdowns and led it to ship fewer vehicles than expected.

UPS shares also slid 3.4% after the shipping giant reported declines in its international and supply chain businesses.

On the flip side, Coca-Cola shares rose 1.6% after the beverage giant topped earnings and revenue expectations, citing a sales volume recovery from the pandemic and higher pricing.

Shares of McDonald’s added nearly 2.7% following mixed second-quarter results, in which net sales were hurt in part by the closure of locations in Russia and Ukraine, but international growth elsewhere fueled a rise same-store sales.

Industrial stocks were earnings winners, too. Shares of 3M rose 4.9% after the company beat earnings and revenue estimates and announced plans to spin its health care business into a separate publicly traded company. General Electric posted better-than-expected results, citing recovery in the aviation industry that boosted its jet engine business. Its shares gained 4.6%.

Traders are also bracing for an onslaught of megacap tech earnings and economic data this week, as well as the outcome of the Federal Reserve meeting, that will help Wall Street direct its expectations for the rest of the year.

“There is this moderating of earnings expectations,” said Stephanie Lang, chief investment officer of Homrich Berg. “The overall corporate sentiment seems to be declining, there is a lot of cautionary commentary around inflation, the dollar”

“As the Fed continues on its trajectory with its main goal to weaken demand for goods and services, that will translate into a weaker top line – if they are able to get inflation under control and temper that demand,” she added. “That’s something we would be concerned about for the second half of this year.”

Fed meeting and the market’s expectations

On Tuesday, the Federal Reserve commenced its two-day policy meeting. Traders are widely expecting a three-quarter percentage point hike and will be looking for clues on the future interest rate path and what it could mean for equity market pricing.

“The bottom line is the Fed, no matter how you cut it, is going to quickly move to that restrictive stance that will have a toll on the economy,” Lang said. “It’s going to get there quickly enough, whether it’s an extra 25 basis points next time versus a month later. Within the next six months we’re going to be in a financially restrictive environment.”