Wall Street may still be too optimistic on the outlook for retailers as the consumers battle the twin headwinds of recession fears and inflation.

As Goldman Sachs chief U.S. equity strategist David Kostin pointed out in a new note Monday, consensus estimates currently expect 10% sales growth and a 24% earnings improvement for the consumer discretionary sector in 2023.

But year to date earnings revisions for Amazon (AMZN) and Target (TGT), with estimates down 33% and 19%, respectively, may be “leading indicators” for the sector’s fortunes come second quarter earnings season.

“Consensus sales and earnings estimates for the consumer discretionary sector in aggregate appear overly optimistic—especially if we are headed for a recession,” Kostin writes. “Earnings for the consumer discretionary sector have declined by an average of 44% peak-to-trough during the past six recessions.”

A sign hangs over the entrance of a Target store on May 18, 2022 in Miami, Florida. (Photo by Joe Raedle/Getty Images)

Mounting challenges for retailers range from $5 plus gas to rising recession worries ahead of the key back to school and holiday shopping seasons.

The University of Michigan’s consumer sentiment reading for June hit a record low, and a new survey from Gallup found consumer confidence is at its worst level since the Great Recession.

Meantime, the Consumer Discretionary Select Sector SPDR Fund (XLY) — which counts discretionary retailers such as Starbucks (SBUX) and Nike (NKE) as top holdings —is hovering near a 52-week low as traders begin to price in profit slowdowns.

“With the second half approaching, warning lights continue to flash across hardline retail. Inflation is accelerating, mortgage rates are +300bps year to date and consumer spending/savings is ‘normalizing’ back to pre-pandemic patterns,” said Wells Fargo analyst Zachary Fadem in a new note.

The analyst recommends avoiding shares of Bed Bath & Beyond (BBBY), Best Buy (BBY), and Wayfair (W).

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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