Stocks fall after Target reports disappointing earnings

Stocks opened with losses Wednesday after Target became the latest in a string of retailers to announce lower-than-expected first quarter earnings and voice concerns about its future profits.

The Dow Jones Industrial Average was down more than 800 points shortly after 12 p.m Wednesday, a decline of 2.6 percent. The Nasdaq composite was down 3.6 percent and the S&P 500 index was down 3.1 percent.

Shares of Target plunged as much as 25 percent lower after the retail giant reported earnings well below Wall Street analysts’ estimates. The company blamed a sharp rise in fuel and employee compensation costs along with fewer sales of nonessential goods.

Target also warned that the company would continue to face financial challenges as gasoline prices continued to rise and consumers spend a greater share of their money on services and experiences instead of goods. Target’s first quarter troubles and dour second quarter outlook also spurred shares of other big retailers lower, including Walmart, Macy’s, Kohl’s and Best Buy.

Walmart also announced lower-than-expected earnings Tuesday due to higher fuel and labor costs, sending its shares down 11 percent by the end of yesterday’s trading alone. Shares of Amazon have also fallen steadily since last week after the e-commerce giant reported disappointing first quarter earnings and said it overinvested in warehouse capacity with demand for goods falling.

Retails have held up well on the whole in 2022, even as consumer prices rose 8.3 percent over the past year. Retail sales rose 0.9 percent in April as a rebound in automobile sales and a pickup in dining powered another monthly increase in consumer spending, according to data released Tuesday by the Census Bureau.

“There is a shift happening on where and how dollars are being spent. Walmart saw a big increase in spending in its grocery business, as consumers spent less on general merchandise,” said Lindsey Bell, chief markets and money strategist at Ally.

“At the same time, the desire to spend outside of the home, at restaurants and bars, for example, remains.”

But after nearly two years of steadily rising consumer spending and a glut of demand for goods, big retailers are now facing stiff economic headwinds amid rising inflation and the Federal Reserve’s battle to tame it.

Retailers are likely to feel a deeper financial squeeze through the rest of 2022 as the Fed boosts interest rates to curb inflation. Higher borrowing costs means retailers will likely see fewer sales as consumers pull back spending while the company also faces the strain of rising rates.

The decline in consumer demand should theoretically reduce inflation as companies are forced to keep prices stable — or even lower them — to ensure they can make as many sales as possible. But ongoing shutdowns in China, shipping delays, port bottlenecks and the economic fallout of the war in Ukraine are all likely to keep pushing prices for oil, food and other key goods higher.

“The persistent inflation pressures have forced the Fed to get aggressive with its monetary policy tightening campaign against the backdrop of slowing economic growth. The ongoing war in Ukraine, rising interest rates, and the recent jump in the U.S. dollar have added to the uneasiness,” wrote analysts at Charles Schwab in a Wednesday analysis.

Stocks have fallen steadily since the start of the year over concerns the combination of higher interest rates and slowing economic growth both in the U.S. and abroad could lead to a global recession.

Fed Chair Jerome Powell expressed confidence Tuesday the central bank could help steer a strong U.S. economy to lower inflation without causing a sharp increase in joblessness or negative growth. He cited the resilience of consumer spending and historic demand for labor as signs of an economy well equipped to handle higher borrowing costs and lower consumer spending.

But Powell made clear the Fed would do whatever was necessary to bring inflation down, even if it meant raising rates to a level meant to restrict the economy.

“Restoring price stability is an unconditional need — it’s something we have to do,” Powell said.

“The economy doesn’t work for workers, or for businesses, or for anybody without price stability,” he continued. “It’s the bedrock of the economy, and it’s something we need to do if we want to have the labor market we all want to have.”

—Updated at 12:13 p.m.