Market Misreads Consumer Demand, Creating Buying Opportunities

The Federal Reserve raised interest rates in September for the first time since 2023, lifting the federal funds target range to 3.75% to 4%. Retail stocks had already begun trading as if this outcome would lead to a slowdown in consumer spending.

Andy Swan, co-founder of LikeFolio and lead analyst at TradeSmith, disagrees with this sentiment. He believes that the retail sell-off is not driven by declining demand but rather by investors overreacting to the potential impact of higher interest rates.

According to Swan's analysis, consumer demand across various sectors has been steadily increasing over the past few months, rising 7.9% year-over-year in August alone. This growth is largely driven by a quarter-point move in policy rates having little effect on high-income spenders who dominate U.S. consumption.

Swan highlights Walmart as an example of this trend, with its demand signal running at multi-year highs due to increased spending from higher-income shoppers who would have previously shopped at Target. He also points to Home Depot's 15% year-over-year increase in consumer demand, driven by homeowners redirecting funds into kitchen renovations and other home improvements.

Amazon, on the other hand, is seen as a unique case due to its exposure to AI infrastructure demand, which Swan believes is accelerating rather than cooling. The company's AWS backlog reached $496 billion in the second quarter, dwarfing recognized revenue over the trailing 12 months.