Dow falls nearly 700 points as retail sales disappoint

New York (CNN) US stocks plunged on Tuesday after fourth-quarter earnings and forecasts from mega-retailers such as Walmart and Home Depot raised concerns about the strength of the US consumer.

The Dow and S&P 500 each ended with their worst day since Dec. 15 — the Dow fell about 696 points, or 2.1%, while the S&P fell 2%. The Nasdaq Composite closed 2.5% lower.

Consumer spending makes up about 70% of US gross domestic product, the broadest measure of the US economy, so a slowdown could weigh on growth and even send the US into recession.

Recent economic data has been strong. But sticky inflation and, now, warnings from bellwether retailers like Walmart and Home Depot have traded on concerns that the already hawkish Fed will keep interest rates higher for longer.

Walmart (WMT) topped earnings expectations, but shares fell nearly 2% in morning trading after the retailer cut its outlook for the year ahead. Walmart’s CFO said he was concerned about inflation and its impact on the American consumer.

“The consumer is still very much under pressure, and if you look at economic indicators, balance sheets are getting thinner and savings rates are declining relative to prior periods,” Walmart Chief Financial Officer John Rainey said during the earnings call. “And that’s why we’re looking quite cautiously at the rest of the year.”

Shares of the company’s stock recovered in the early afternoon, closing up about 0.6%.

Home Depot (HD) reported record earnings for the fiscal year that ended in January, and increased both hourly wages for employees and stock dividends for investors. But fourth-quarter numbers painted a different picture, as the company missed revenue expectations for the first time since 2019, before the pandemic.

The company also lowered its outlook for the year ahead as executives struck a more cautious tone about recession and inflation forecasts on the call that followed earnings. Shares of Home Depot stock fell 7.1 percent on Tuesday.

“After a year of defying gravity, the slowing economy and consumer pressures have finally caught up with Home Depot,” said Neil Saunders, CEO of GlobalData. “For most of 2022, the number of existing homes sold has been in decline. However, the rate of decline accelerated in December with the volume of completed sales down a sharp 36.3%.”

Still, the home improvement chain said it isn’t taking a hit from the weakness in the home sales market resulting from higher mortgage rates. In fact, CFO Richard McPhail said the company could benefit from the current state of the housing market, as homeowners have more incentive to repair their current homes rather than move.

“Over 90% of American homeowners either own their homes outright or have fixed-rate mortgages below 5%,” McPhail said. “And so that incentive to sell and move to a higher rate mortgage just isn’t there. And in fact, the incentive is really there to improve in place.”

Target, Best Buy, Macy’s and Gap will report later this month.

Investors, meanwhile, are bracing for a week full of key economic data. The minutes from the Fed’s last meeting will be published on Wednesday, and a new revision of GDP will be published on Thursday. On Friday, January’s personal consumption expenditures — the Fed’s preferred inflation gauge, will be released.