As the year draws to a close, the world enters the festive Christmas shopping season, a critical period for retail giants in Europe and America. The performance of these major retailers is closely monitored as it serves as an indicator of the overall spending habits of American consumers. Analysts assert that the results from these retail behemoths not only provide crucial forecasts for the upcoming holiday shopping spree but may also uncover the tangible impacts of tariff policies on their operations.

This week, a report from Inditex, the parent company of Zara, raised concerns regarding the performance of European retailers. Although Inditex, the largest publicly traded fast-fashion retailer globally, suggested that the holiday shopping season had started positively, it announced quarterly sales and profits that fell surprisingly short of expectations. Shares hit an all-time high on December 5, with a remarkable 40% increase since the start of the year, but following the report, the stock tumbled approximately 5%.

Inditex SA reported that as the crucial holiday shopping season commenced, sales growth saw a notable slowdown, which resulted in a significant drop in its stock price. For the five weeks ending December 9, excluding currency fluctuations, revenues grew by 9%, compared to 14% during the same period last year. This outcome was also lower than the sales growth for the preceding nine months, indicating a concerning trend. The report stated that for the six weeks leading up to December 9, including the crucial Black Friday promotions, revenue growth, adjusted for currency, was also 9%, markedly trailing the prior year’s 14% growth rate.

In stark contrast to the sluggish performance of the Eurozone economy, the American consumer market appears to be holding up well. Consumer spending in the United States remained robust in October, with modest growth observed in various segments. Of note, spending on services accounted for the majority of household expenditures, rising by 0.2% month-over-month, largely driven by healthcare expenses, while spending on goods saw a slight uptick.

Industry organization National Retail Federation (NRF) has projected that holiday sales from November 1 to December 31 will increase by between 6% and 8%. Data from Mastercard and Salesforce indicates that the 2024 holiday shopping season kicked off with record numbers, with overall holiday sales expected to rise by approximately 3% to 4% compared to last year, while online sales are anticipated to grow by around 8% to 10%. This could mark the best holiday shopping season since the pandemic began, providing a positive signal for the performance of retail giants.

The significance of the U.S. retail market cannot be overstated; its contribution to economic output highlights its crucial influence on the broader U.S. economy. Consumers typically ramp up their spending during the festive season, driven by holiday cheer and promotional activities by retailers. This trend often injects seasonality into the U.S. stock market, creating potential upsides. Should consumer spending remain strong, it may diminish the necessity for the Federal Reserve to consider deep interest rate cuts in the forthcoming year, thereby affecting the overall performance of financial markets. Consequently, the stock performance of major retailers will receive heightened scrutiny during this season.

Analysts predict that consumer demand in the U.S. will gradually improve by 2025. However, with persistent inflation and cautious consumer behavior, overall growth is expected to remain subdued. American consumers are increasingly prioritizing value for money, postponing purchases of big-ticket items, and opting more frequently for private label products. At the same time, retailers and suppliers are making slow progress on price reductions, reflecting a conservative approach to managing inventory and profit margins.

The Royal Bank of Canada has recently upgraded Walmart, Chewy, and Ollie’s Bargain Outlet, designating them as sector picks with raised target prices. The bank emphasized Walmart’s growing reliance on advertising and membership revenue, which currently constitutes about one-third of its operating profits.

Walmart has shown remarkable performance during the holiday season, with third-quarter results surpassing expectations. The net profit surged to $4.6 billion, prompting the company to raise its full-year earnings forecast. Since the results announcement, the stock price has reached new heights. Over the past year, Walmart’s stock price has more than doubled and has significantly outperformed the market. Notably, Nvidia is the only stock in the Dow Jones Industrial Average that has increased more than Walmart this year, while Amazon has seen a 50% rise since its inclusion in the index earlier this year.

This trend underscores investor confidence in the retail giant’s growth trajectory. If Walmart continues to report double-digit growth in quarterly earnings, it can sustain its currently elevated valuations. Currently, the expected price-to-earnings (P/E) ratio for fiscal year 2025 stands at 34 times, considerably higher than the five-year average P/E ratio of 23. This ratio is more than double the P/E ratio of approximately 16 times for the SPDR S&P Retail ETF. However, attention must be paid to potential impacts of trade policies in the coming year, which could significantly affect Walmart’s profitability.