Goldman Sachs Group said that the first signs of a decline in consumer purchasing power indicate that it will pass through corporate profits, which poses a greater risk to US stocks due to the selling of shares by the US household sector.
High inflation and low asset prices are beginning to strain household finances, Goldman strategists led by David Kostin wrote on Friday. They pointed to a 0.3% drop in retail sales in May and a record low reading of consumer confidence in Michigan for June.
Strategists said retailers such as Target and Walmart have overestimated consumer demand in some general merchandise categories and are now offering deep discounts to cut excess inventory.
Analysts pointed out that the decline in consumer spending represents a threat to the profits of consumer retail companies, and automakers in particular.
This comes as used car prices have fallen by 6% since January, a sign that demand for cars in general may falter.
Goldman still expects the general S&P 500 index to close at 4,300 points, compared to an average of 4,650 points among investment banks’ strategic goals, compiled by Bloomberg and reviewed by Al Arabiya.net, as of mid-June.
On Friday, the index closed at 3,911 points, down about 18% so far this year, and is struggling with factors such as higher Fed rates and high inflation.
Kostin and his team said some investors are concerned that the rising cost of living, higher bond yields and subsequent weak stock returns could lead to households capitulating in the stock market and put more pressure on stock prices.
But the data shows that household demand for stocks has remained “surprisingly strong” this year, they said.
The strategists wrote: “The S&P 500 has risen by 8% on average during the years that households have sold very aggressively since 1950.