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Five problems for retail stocks that Wall Street may be ignoring

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Yahoo Finance Live anchors break down the five problems for retail stocks that Wall Street may be ignoring.

Video transcript

BRAD SMITH: Wall Street might be too optimistic on retail stocks. Goldman Sachs estimating 24% earnings improvement in 2023. But Brian Sozzi the Street might be ignoring some key warning signs for retailers. That's where we find Sozzi's Take. Sozz.

BRIAN SOZZI: Yeah, you do get the sense that the bad news is continuing to pile up in the retail space. And you'll probably get more bad news from the likes of Bed, Bath & Beyond, when they report earnings later this week. Maybe not necessarily Nike when it reports after the close today, but nonetheless, a good little nugget inside of a note by David Kostin out this morning, looking at, like you mentioned, Brad, earnings estimates for next year for consumer discretionary stocks up 24%. Sales expected to be up 10%.

Now Kostin is arguing that Amazon and Target, they're starting to see estimates come down. You're looking at Amazon. Earnings estimates year to date have been taken down by 33%, Target by 19%. And I think Kostin is arguing this is a leading indicator to what you could see from a lot of companies, not just retailers and other consumer discretionary companies, as they report second quarter earnings coming up in a few weeks. And this could be potentially a negative headwind for stocks.

Now going back to retailers real quickly, I put up-- I made a quick little list or a checklist of some problems with retailers right now. And here's a very simple checklist, as you prepare and do your homework for earnings season. One, slowing job market, and that is likely to impact retailers in numerous ways, stubborn inflation. Obviously, retailers like Target are being hit by higher diesel prices. And of course, their consumers are being hit by higher gas prices.

Bear market in stocks, what does that mean for purchasing, let's say, luxury goods or home goods, even, at a Target? Bloated inventories, Target really set that warning signal out there a couple of weeks ago with its concerning conference call. And then last, slow-moving executives. I think you have a lot of retailer executives in the space, at least ones that I've talked to, saying they're probably a little bit behind the curve on this consumer spending slowdown. And they're going to probably have to move aggressively, like Target, even like a Walmart, to mark down their inventories.

Last but not least, my take here is this. You have to watch earnings trends moving forward. It's one of the most important signals, I think, in the market at this point in time. The argument could be made and we were talking about to Keith [INAUDIBLE] earlier on in the show-- earnings estimates have not come down enough to account for slowing economic growth.

JULIE HYMAN: But here's my big question-- do stocks bottom before earnings do?

BRIAN SOZZI: Mm-hmm.

JULIE HYMAN: So in other words, even if earnings estimates start to come down, it's well within the realm of possibility that stocks could bottom before then.

BRIAN SOZZI: It's true.

JULIE HYMAN: Right?

BRIAN SOZZI: You make a good point. You can make the point we're in a bear market, obviously, right now. And that has priced in earnings estimates and sales estimate downgrades. But again, look. You see these estimates coming down from Target in recent weeks, and the stock has still been under pressure. So that's probably the other side of the coin.

JULIE HYMAN: Well, we'll see what happens.

BRIAN SOZZI: We'll [INAUDIBLE] though.

JULIE HYMAN: Yeah, I mean, when you talk about nimble executives, Target, I think, gets some points for being aggressive--

BRIAN SOZZI: Absolutely.

JULIE HYMAN: --on that front, even though it's been punished for it, to your point, also.

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