By Sabrina Escobar

U.S. shoppers have shrugged off economic headwinds for years. But with retailers starting to pass along tariff costs, the true test of consumer strength -- and of retail stocks -- is just beginning.

Despite dire predictions about the potential impact of tariffs, major retailers haven't had a difficult time unloading their goods. Target,

Lowe's, Walmart,   Amazon.com, and TJMaxx parent company TJX all posted better sales than expected in the past quarter, noting that demand held steady. If nothing else, it suggests that Americans still have money -- and are willing to spend it. 

"During consumer earnings season, it always feels like investors are looking to poke holes in the health of the consumer, but time and time again, we continue to witness that to be a fruitless task," says David Wagner, head of equity at Aptus Capital Advisors. "The consumer continues to carry on."

Part of that resilience stems from a strong labor market, which has also been a key driving force behind consumer spending for the better part of the past five years. Shoppers -- particularly those in higher-income demographics -- have also been emboldened by a historically low unemployment rate, consistent wage gains, and a record-breaking bull run on equities.

But there's another reason for the persistence of consumer strength -- shoppers haven't yet felt the sting of higher prices. That is largely because many retailers imported products ahead of spring and summer tariff implementations, allowing them to keep most of their prices unchanged, and have been willing to eat some of the higher costs.

The reaction to earnings, however, suggests that doubts are seeping in. Walmart dropped 4.5% on the day of its release, while BJ'sWholesale Club lost 6%, and Target, 6.3%, though the last had more to do with its choice of a new CEO than its business. And those doubts largely stem from new tariffs as retailers restock inventories for the holiday season and companies are forced to pass on higher import costs to consumers to protect margins. "I don't think you really start to feel the pinch of tariffs until the third quarter, so I think that's the make-or-break quarter," says Steven Shemesh, an analyst at RBC Capital Markets.

Look no further than Walmart, whose stock has earned a premium valuation for its ability to attract shoppers with its low prices. On Thursday, CEO Doug McMillon said the impact of tariffs has been "gradual enough that any behavioral adjustments by the customer have been somewhat muted." But he warned that the company has seen costs increase each week as it replenishes its inventories at post-tariff price levels -- a trend that McMillon expects to continue into the third and fourth quarters. And while Walmart plans to keep prices as low as possible, some increases are inevitable, especially after the company missed earnings expectations despite its superior revenue growth.

High prices, however, could turn off shoppers who had been attracted by perceived bargains in the first place. As a result, retailers must now walk a tight line between protecting profits from tariff increases and continuing to grow sales, which has already prompted management teams to make difficult trade-offs as they test the limits of consumer elasticity. Walmart executives, for instance, said on Thursday that the number of units sold declined in the second quarter among discretionary items that have already seen tariff price hikes. Home Depot CEO Ted Decker attributed a slight decrease in the company's second-quarter transactions to a "modest pullback" in promotions for outdoor and garden materials as a way to offset tariff costs. And Target decided not to repurchase any shares in the second quarter, citing tariff uncertainty.

"We understand what our customers want, and what they don't want," said Lowe's CEO Marvin Ellison. "And we understand the breakpoint on units when you start to price in a way that you see demand go down. And so, we're managing this literally real time because this is uncharted waters."

By the looks of it, it's uncharted waters for investors, too.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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August 22, 2025 12:13 ET (16:13 GMT)

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