Harsh Retail Sales Adds to Israel-Iran Stress on the Market

The stock market looks to give back some of Monday's gains as the Israel-Iran conflict escalates, dashing hopes for a quick resolution.

Data shared by LPL Financial found that, while the market dealt with numerous conflicts over the last several decades, its analysis of 25 geopolitical shocks dating back to the Pearl Harbor attack in 1941 showed that stocks have been resilient. Per those LPL findings, total drawdowns around these events have averaged 4.6% over an average of roughly 19 days. We’ll continue to be patient as we look for compelling opportunities to present themselves, and when it comes to the Portfolio’s existing holdings, we’ll be prudent investors where it makes sense.

The market is also contending with Tuesday morning’s weaker-than-expected May Retail Sales report, which contained a few bright spots for us. As it relates to GDP expectations for the current quarter, this report should lead current forecasts lower, but we’ll have a better sense as to how much of a revision once the May Industrial Production and Housing Starts reports are published. The Industrial Production one will be out later on Tuesday morning, while the one for Housing Starts will be out on Wednesday at 8:30 a.m. ET.

Once we have that aggregate data in hand, we’ll have a better sense of what the Fed will likely say about the economy exiting Wednesday's policy decision. As of now, we expect the Fed will reiterate its cautious stance, looking to collect more data on the impact of tariffs while it watches the labor market. While we doubt either the May Industrial Production or Housing Starts reports will alter that view, we’ll keep an open mind and let the data talk to us.

May Retail Sales Miss Market Expectations

Headline Retail Sales for May fell 0.9% compared to April, a bit weaker compared to the 0.7% drop forecasted by the market, but so did retail sales ex-auto sales, which fell 0.3% month over month, missing the expected 0.1% increase.

Excluding food services, retail sales fell 0.9% compared to April, but on a year-over-year basis rose 3.0%, a far slower pace than April’s 4.7% year-over-year increase. That suggests consumers pulled forward spending in April ahead of expected tariffs, and the 4.2% year-over-year increase in retail-only sales in March 2025 to May 2025 supports that thinking.

Digging into the May Retail Sales report, non-store retailers — Commerce Department speak for "digital shopping" — rose 8.3% year over year in May, supporting our view that consumers would lean into that shopping modality to help stretch disposable spending dollars. We see that continuing and accelerating further in the coming months given Amazon’s AMZN Prime Day 2025 that will span four days compared to two last year. And yes, we should see a raft of competing digital shopping orders from the likes of Walmart WMT, Target TGT and others around the July 8 to July 11 Prime Day window.

Other areas of spending strength in May included Furniture and home furnishing stores, which is somewhat surprising given the year-over-year drop in electronics and appliance stores and building materials sales. That strength especially stands out against the sequential year-over-year declines in both grocery store sales (+2.3% in May versus 2.8% in April) and food services (+5.3% in May versus 6.9% in April) that suggest consumers tightened their belts in May.

As we look at the monthly retail sales report, let’s remember that it is primarily goods-facing and does not capture spending on services, such as travel and leisure, entertainment, healthcare and haircuts. Looking at the Visa’s V Spending Momentum Index (SMI) data for May we see discretionary spending dipped compared to April but was stronger compared to May 2024. Interestingly, while non-discretionary spending accounted for more of the May SMI, it declined more on a sequential basis than discretionary spending and was essentially unchanged compared to May 2024.

Comparing the findings of the May Retail Sales report against Visa’s May SMI findings suggests consumer spending on services has likely held up better than expected. We’ll get a clearer picture when the May Personal Consumption Expenditures (PCE) data is published later this month. As we wait for that data, we’ll continue to monitor other reports that reflect consumer spending.

JetBlue May Be Having a JetBlue Problem

These range from other spending surveys to TSA travel data and company comments. That includes Tuesday morning’s announcement from Jet Blue JBLU that it is cutting more flights due in part to softer-than-expected travel demand. What raises our eyebrow a bit on JetBlue’s announcement is quarter to-date TSA checkpoint travel numbers are up more than 17% compared to the same period for the March quarter. And when we compare the quarter-to-date TSA checkpoint figures to the same period last year, they are down about 1%. This seems to be more of a JetBlue problem than an air travel one.

That analysis and the findings in Visa’s May SMI data as well as the pending card refresh, we discussed in yesterday’s video, keep us bullish on the shares of American Express AXP.

Finally, as it relates to Costco COST, comparing the May Retail Sales report against the company’s 5.5% adjusted comp sales figure for May should leave little doubt it continues to win wallet share.

While the shares are below our $990 pick-up point, we shared on Monday that we would tread carefully near-term. Should they successfully test the 100-day moving average currently at $990.83, that would bring additional confidence for picking up shares even as the market reacts to the escalating conflict in the Middle East.

Coming Up: Marvell’s Custom AI Event

At 1 p.m. ET on Tuesday afternoon, Pro Portfolio holding Marvell MRVL will hold its Custom AI Investor Event, which is as its name suggests will dig into the company’s custom AI silicon business.

The event should showcase Marvell’s capabilities that led it to win business with Amazon, Microsoft MSFT, Meta META and others. As we drink in management’s comments and the Q&A portion of the event, we’ll be listening for insights about additional customers, end market demand in general, and timing for custom AI silicon launches.

Coty to Split into Two?

We are seeing rumblings that former Portfolio holding Coty COTY is contemplating a sale of its two divisions, Luxury and Consumer.

When we owned the shares, we recognized the more lucrative business was the Luxury one, which was not only faster growing but commanded higher margins as well. Said another way, Coty’s margins and returns have been weighed down by the Consumer business, which has faced multiple challenges ranging from consumer spending to direct-to-consumer (DTC) competition.

If Coty were to exit the Consumer business and become a pure-play Luxury brand that would be an interesting development, in part because it would make it a more attractive takeout play for larger luxury companies ranging from LVMH LVMHF and Kering PPRUF to Estee Lauder EL.

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At the time of publication, TheStreet Pro Portfolio was long AMZN, MRVL, MSFT and META.