Stocks rise on signs of consumer strength despite rising prices, Home Depot leads Dow higher

U.S. stocks gained on Tuesday after a strong October retail sales report and better-than-expected third-quarter results from Home Depot and Walmart signaled the U.S. consumer is still ramping up spending even in the face of rising prices.

The Dow Jones Industrial average added 142 points, or 0.4%. The S&P 500 gained 0.4% and the Nasdaq Composite rose 0.4% as well. The major averages have been stuck in a rut in recent days after touching records last week. However, all three are within 1% or less from their respective records.

The latest retail sales figures for October showed consumers were increasing their spending, with sales jumping 1.7%. That compares to a 0.8% increase in the prior month. The report showed broad strength in a number of categories from autos to sporting goods. Online sales were up 10.2% from a year ago. The gains came even as consumer prices surged 6.2% year-over-year last month, inflation not seen since the 1990s.

Home Depot was the biggest gainer in the Dow by far on Tuesday, jumping more than 5% after results topped estimates and net sales jumped 9.8% last quarter. The home improvement retailer also said fiscal fourth-quarter sales were already tracking higher than last quarter, pointing to a possible strong year-end finish.

In another sign of consumer strength, Walmart reported third-quarter profit and revenue well above estimates, and U.S. same-store sales jumped 9.2%, excluding fuel. However, digital sales saw growth of just 8%, compared to Street expectations of 20.5%. The shares pulled back 3%.

“With the robust retail sales read and solid start to retail earnings, it’s crystal clear that inflation isn’t standing in the way of consumers,” said E-Trade’s Mike Loewengart. “Despite some hiccups on the labor market and inflation fronts, this could serve as the vote of confidence investors needed signaling that the economy is still chugging along nicely. As we narrow in on the holiday shopping season, the question remains if better than expected numbers from retailers from Q3 can continue to close out 2021.”

Goldman Sachs said those earnings beats can and should continue through at least 2022. It issued a bullish outlook on the market Tuesday, with strategist David Kostin saying he expects continued earnings growth to drive the S&P 500 to 5,100 at the end of 2022, a return of roughly 9% from here.

“Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022,” he said. “S&P 500 EPS will grow by 8% to $226 in 2022 and by 4% to $236 in 2023. Our EPS estimate is 2% above 2022 bottom-up consensus. Companies have consistently expanded profit margins despite input cost pressures and supply chain challenges.”

On Monday, the Dow dipped about 13 points, or 0.04%, for its fourth negative session in the last five. The S&P 500 finished the day unchanged at 4,682.87 and the Nasdaq Composite dipped 0.04%. The Russell 2000 was the relative underperformer, declining 0.45%.

Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said he believes inflation will moderate in 2022, but that “the path to lower inflation [will] begin with higher inflation in the front half of the year.”

“The stickier drivers of inflation are likely to persist, but our base case is that they will not outweigh the improvement we expect in the transitory elements,” he wrote in a note to clients.

On Monday afternoon President Joe Biden signed the $1 trillion bipartisan infrastructure bill into law. The package includes funding for transportation, broadband and utilities.