In October, the U.S. stock market entered a unique phase—a "data vacuum" caused by the government shutdown, leaving investors navigating in fog. Against this backdrop, corporate earnings reports (particularly in consumer stocks) have become more than just company scorecards; they now serve as critical windows into the health of the U.S. economy, especially in gauging consumer behavior. Recent Q3 earnings from retail giants like Target, Walmart, and Home Depot reveal divergent economic narratives. What story do these reports tell about American consumption?

**Earnings Season: Divergence and Common Threads** The broader Q3 earnings season has been robust, with FactSet data showing 92% of S&P 500 companies reporting by mid-November. Earnings grew over 13% year-on-year, and more than 80% beat expectations. However, consumer sentiment tells a different story. The University of Michigan’s preliminary November Consumer Sentiment Index dropped to 50.3 from October’s 53.6, hitting a three-year low, reflecting concerns over inflation and job market stability.

Retailers have long warned that tariffs would drive up prices, exacerbating inflationary pressures and squeezing household budgets. The sector now shows a "tale of two extremes": discount retailers like TJX Companies thrive on value-seeking shoppers, while mid-market players like Target struggle, signaling middle-class spending contraction. This "K-shaped" consumption split—strong luxury and bargain demand but weak mid-tier—complicates Fed policy decisions.

**Travel Defies the Trend** High-end travel demand remains resilient. Expedia posted better-than-expected Q3 results and raised its full-year outlook, while Carnival Cruises and airlines report record demand. Booking Holdings noted robust U.S. outbound travel, underscoring affluent consumers’ sustained spending on premium experiences.

**Morgan Stanley’s Warning** Lisa Shalett, CIO of Morgan Stanley Wealth Management, cautioned that while the macro outlook stays cautiously optimistic, the "K-shaped" economy reveals cracks among lower-to-middle-income consumers—who drive marginal spending growth. Oxford Economics data shows the lowest income quintile spends six times more of each additional dollar than the wealthiest. Without their support, 2026 prospects grow "increasingly fragile."

**Retail Report Cards** 1. **Walmart: The Essential Anchor** Walmart raised its FY2026 profit guidance after a strong Q3, easing fears of consumer pullback. CFO John David Rainey highlighted stable spending, though low-income households showed "slight moderation." E-commerce growth, cost reductions, and marketplace expansion were bright spots.

2. **Target: Middle-Class Barometer Sags** Target’s mixed Q3 saw EPS beat ($1.78 vs. $1.71 expected) but revenue miss ($25.27B vs. $25.29B). Comparable sales fell 2.7% (worse than -2.1% expected), with gross margin dipping to 28.2% on markdowns. The stock dropped 2.77%. CFO James Lee cited weakened discretionary categories (apparel, home goods) and trimmed FY2025 EPS guidance to $7-$8 (from $7-$9).

3. **TJX: Discount King Rides the Wave** TJX’s Q3 revenue rose 7.5% to $15.12B (beating by $260M), with comp sales up 5%. The off-price retailer lifted FY2026 guidance, forecasting 4% comp growth and EPS of $4.63-$4.66 (above consensus). Its "treasure hunt" model attracts all income tiers seeking value.

4. **Home Improvement Slump** Lowe’s joined Home Depot in cutting annual targets as consumers defer big-ticket renovations. Lowe’s now expects flat comp sales and adjusted EPS of ~$12.25 (down from $12.20-$12.45). CFO Richard McPhail blamed mild weather, housing market strains, and consumer caution.

**Conclusion: Engine Still Running, but Mind the Gaps** While consumer confidence matches 2022 recession lows and job growth stalls, aggregate spending hasn’t collapsed. The divide is clear: Walmart and discounters shine, but mid-market and discretionary retailers flounder. Investors should favor recession-resilient essentials and value players, staying wary of discretionary-dependent names. Holiday sales and employment data will be key to validating trends.