According to Goldman Sachs Group, the first signs that the tightening of the consumer belt is affecting corporate profits are coming, which poses a greater risk for American stocks than the sale of stocks by American households.
High inflation and falling asset prices have begun to weigh on household finances, Goldman strategists led by David Kostin wrote on Friday. They cited the 0.3pc drop in retail sales in May and Michigan’s record consumer sentiment reading for June.
Retailers such as Target and Walmart appear to have overestimated consumer demand in certain general merchandise categories and are now offering discounts on items to eliminate excess inventory, strategists said.
“The decline in consumer spending poses a threat to earnings for consumer discretionary stocks and the auto industry group in particular,” they said.
“Used car prices are down 6% since January, a sign that overall demand for vehicles may be weakening. The consensus expectation of 13% industry sales growth in 2023 seems Pollyannaish.”
Goldman still expects the S&P 500 to end the year at 4,300, versus a median of 4,650 among strategist targets compiled by Bloomberg in mid-June.
The gauge closed Friday at 3,911.74. It has fallen about 18% so far this year, struggling with factors such as Federal Reserve rate hikes and stubbornly high inflation.
During the opening exchange of their meeting in the Bavarian Alps, the leaders of the Group of Seven discussed how to coordinate action to combat soaring inflation and counter the threat of recession, as well as how to keep the pressure on Russia following its invasion of Ukraine.
Some investors worry that the rising cost of living, rising bond yields and weak equity returns could lead to household capitulation in the stock market and further pressure on equities, Kostin and his team said.
But the data shows household demand for equities has remained “surprisingly strong” this year, they said.
Also, since most of the property is owned by wealthier people who are more sheltered from inflation, and businesses tend to buy when households are selling, the business doesn’t worry as much about these factors than factors that would drive the stock down.
“The S&P 500 has risen 8% on average in the years since 1950 when households sold stocks most aggressively,” the strategists wrote.