The week had two halves. Wednesday's July CPI came in at 3.4% with core at 2.5%, the S&P closed at a record 7,799 on Thursday, and the memory trade kept working: Micron and Sandisk rallied on new NAND products and Sandisk's investor day. Then Friday: July retail sales fell 0.6% against expectations of a small gain, the largest drop in over a year, with autos down 1.8% and online down 2.2%. The University of Michigan's sentiment index printed 51, with one-year inflation expectations at 4.3%.
Both of those things are true at once, and that is the story. Asset owners are having a wonderful year. People who buy gasoline and groceries with a paycheck that grew 3.2% while headline inflation ran above 4% for the spring are not. This week Home Depot, Target, and Walmart report, and they are going to describe that split in detail.
The Valuations Already Tell You the Trade
Walmart reports Thursday. It has been the safe-haven consumer stock for two years and trades like it: a multiple that would flatter a software company, on the theory that it takes share from everyone in a downturn. That theory is right, and fully priced. What is not priced is the cost side. Fuel was a headwind all spring, tariff refunds are being reinvested in prices rather than dropped to profit, and drug price caps are a drag on the pharmacy comp. A comp that is merely good, say under 3%, would be a disappointment at this multiple. That is not a print to be long into, and a short-dated put has merit if the stock runs into it.
Target reports Wednesday. It is the mirror image: a stock the market has given up on, at a fraction of Walmart's multiple, with a turnaround that has shown up in the digital numbers before the total. Expectations are for comps around 2%. Anything above that with a raised guide, and the stock has a lot of room. That is where the consumer trade is this week.
Home Depot, tomorrow, is a housing-and-rates story more than a consumer one. Comps have been negative or flat for a long time, and with mortgage rates pinned by a 10-year near 4.67%, I am not expecting an inflection.
The Long Bond Is the Real Risk This Week
The 10-year rose to 4.67% last week even as CPI came in tame, and the stated reason was supply: heavy AI-related corporate bond issuance competing with Treasury for buyers. The 30-year has been flirting with 5% since the Fed's hawkish hold in July. Wednesday brings a 20-year auction, and long-end auctions in this environment have been getting messy.
A bad auction that pushes the long end through 5% would hit every long-duration asset at once, the megacaps included, and it would do so in a week when the equity market is at a record and positioned for calm. A small curve-steepener in Treasuries and some trimming of the past month's biggest megacap winners into strength are the sensible hedges. Jackson Hole is next week, and Chair Warsh will be speaking to a bond market that is already nervous.
Key Levels
| Target comps, bull case | Above 3% with a raised guide |
| Walmart US comps, what the multiple requires | Above 3.5% |
| 20-year auction Wednesday, danger sign | A tail and a yield above 5.2% |
| 30-year yield, level that hits equities broadly | Above 5.25% |
| Consumer sentiment, recession-signal territory | Sub-50 in the final August read |
My Take
The consumer is splitting in two, and the big-box earnings this week will say so. The market has priced Walmart as the winner and Target as the loser, which is exactly backwards from a risk-reward standpoint. The bigger danger to the whole market is a long-bond auction going wrong.
Playbook: Target into Wednesday, not Walmart into Thursday, not Home Depot, trim megacap winners, and a small curve-steepener in Treasuries ahead of the 20-year auction and Jackson Hole.