Global growth and consumer spending have been in a tight spot this year due to elevated fuel prices courtesy of the Iran war, which continue to pressure household budgets and limit discretionary spending. U.S. inflation print has come on the higher side.

But to our surprises, even with these challenges, overall consumer spending has remained resilient. That stability helped many retailers deliver solid first-quarter results, easing concerns that higher costs would significantly dent demand.

Note that the overall earnings season unfolded lately remains strong and broad-based. Companies not only easily beat consensus estimates but also provided reassuring outlook on the economy despite elevated energy costs and other risks. We also saw positive momentum on the revisions front, with estimates for the current and upcoming quarters rising.

Low Retail Expectations Set the Stage for Big Reactions

Investors were particularly encouraged by earnings reports from Dollar Tree and Best Buy. While both companies executed well in a difficult environment, the strong market reaction was also driven by how low expectations had become heading into earnings season.

Dollar Tree DLTR has added 16.6% over the past month (as of June 4, 2026). Best Buy BBY stock has jumped about 24% during the same timeframe. While Dollar Tree sells household items at low price points, Best Buy focuses on higher-priced technology and products. This shows consumers across the board are navigating difficult conditions, and that conditions were not as bad as feared.

Walmart Faces a Different Challenge

Walmart found itself on the other side of the equation. The retail giant delivered results that were largely consistent with its recent track record, but that wasn't enough to impress investors.  WMT stock has slumped 7.8% over the past month (as of June 4, 2026) due to its cautious full-year guidance and an apparently ripe valuation.

Job Growth Provides Support to Consumers

Nonfarm payrolls jumped a seasonally adjusted 172,000 in May, down slightly from the upwardly revised 179,000 in April and way higher than the Dow Jones consensus estimate for 80,000, as quoted on CNBC.

The unemployment rate held steady at 4.3%, as expected. Average hourly earnings rose 0.3% for the month and were up 3.4% over the past year, both in line with the Wall Street consensus, as reported by CNBC.

Earnings Growth Trend of the Retail Sector

The sector posted 1.3% earnings growth in the first quarter of this year, and is expected to record 6.9% growth in the second quarter, followed by 4.9% earnings growth in the third quarter and a 14.5% surge in the final quarter of the year.

Overall, the earnings growth of the sector is expected to be 6.7% in 2026 (versus 20% expected earnings growth in the S&P 500) and 19.2% in 2027 (versus 16.7% expected earnings growth in the S&P 500).

Bottom Line

While the situation is not that grave for the space, the earnings growth momentum is not too bullish either for the near term. Inflation has been a constant concern. Rates may rise ahead, which may force the Fed to act in a hawkish manner.

But the valuation of retail stocks is currently cheap. State Street PDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report) trades at a forward price/earnings ratio of 14.03X, while State Street SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) trades at a forward price/earnings ratio of 22.83X.

The cheaper valuation than the S&P 500 ETF may indicate that ETFs like XRT may turn around even if the retail sector’s earnings growth lags the key U.S. equity gauge. VanEck Retail ETF (RTH Quick QuoteRTH - Free Report) is another play in this arena.