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Shares of retailers were pummeled on Wednesday as investors dug through the latest earnings results from Target (TGT) and Walmart (WMT), which were flush with signs that the economy is entering a period of deep uncertainty.

What’s happening: Inflation is already causing consumers to pull back spending on some items as they look to cut expenses, a shift that will have major consequences for the next phase of America’s recovery from the pandemic, the country’s top chains revealed.

Target reported a 52% drop in profit for its most recent quarter, stunning Wall Street. The company blamed higher expenses due to ongoing supply chain disruptions, but also said rising prices had encouraged shoppers to pull back spending on non-essential items.

That left it with too much inventory of some products, especially for kitchen appliances, TVs and outdoor furniture. Its shares plunged 25% on Wednesday, their worst day since 1987.

The results came one day after Walmart’s stock logged its worst day since 1987. The country’s largest retailer said its profit dropped 25% last quarter and revised its full-year expectations lower.

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Strategist explains why we've 'reached peak inflation'
02:42 - Source: CNN Business

Alarm spread to other companies in the sector. Shares of Best Buy (BBY) and Macy’s (M) fell almost 11% on Wednesday, while Costco lost 12%

Shoppers are concerned about “the high and persistent inflation they’ve been experiencing, particularly in food and energy,” Target CEO Brian Cornell said during a conference call with analysts, though he stressed that consumers remain “resilient” and continue to benefit from pent-up savings and excitement around seeing friends and family again.

Traffic to stores remains robust, rising almost 4% year-over-year, and May is off to a healthy start, he added.

But analysts poring over the results said they represented a sea change after the boom era that followed Covid lockdowns.

Flush with stimulus checks and money they’d stashed away while staying at home, Americans spent with abandon. Now, as bills rise, anxiety is forcing many households to be much more cautious — and stores have been caught off guard.

“Few companies are so entwined into so many aspects of the US economy as [Walmart] and [Target], and their logistics and supply chain operations rival or exceed those of most other companies,” Bespoke Investment Group said in a note to clients. “If they’re having these types of issues keeping up with the rapidly changing environment, who isn’t?”

Scott Mushkin of R5 Capital said after Target’s earnings that he now sees the environment for retailers as uninvestable, at least in the short-term.

“Inflation and costs are out of control, consumer spending is swinging wildly and, at least in our minds, fear is growing around how long the consumer spending can hang in there,” he wrote in a research note.

Target’s stock price drop on Wednesday seems to indicate that investors are bracing for “the idea that this shoe is likely to drop.”

“This leaves us to ponder if the unprecedented boom of the last two years will be followed by an unprecedented bust, the scope of which we can’t even imagine,” Mushkin said.

The controversial hedge fund Melvin Capital is shutting down

When an army of day traders coordinating on Reddit set their sights on GameStop shares early last year, many hoped to punish a single man: Gabe Plotkin of Melvin Capital.

The hedge fund had made a bet that shares of GameStop would fall. It got battered when the stock soared about 1,700% in a single month.

Now, as the market plunges, Plotkin has announced that Melvin Capital is shutting down.

In a letter to investors seen by Reuters, he said that the last 17 months had been “an incredibly trying time.”

Melvin Capital had $12.5 billion in assets at the start of 2021, and was seen as one of the most successful hedge funds on Wall Street. Then its fortunes changed.

The firm had $7.8 billion in assets at the end of April. It lost 23% in the first four months of 2022, a person familiar with the fund’s finances told Reuters.

Plotkin said Wednesday that he had begun the process of exiting positions and would stop charging management fees at the beginning of June. He added that he had “given everything” he could, but it still wasn’t enough to deliver the returns clients expected.

Big picture: The shuttering of Melvin Capital is a stunning fall from grace. It shows the lasting effects of not only the meme stock frenzy last year, which shocked many traditional investors, but also far-reaching implications of this year’s volatility, as fears about inflation, interest rates, China’s response to the pandemic and the war in Ukraine leave investors with few places to hide.

Musk rages as Tesla gets the boot from S&P’s ESG index

Tesla has been kicked out of the S&P 500 index that highlights companies that prioritize environmental, social and governance — or “ESG” — issues. CEO Elon Musk is not happy about it.

“ESG is a scam,” he tweeted. “It has been weaponized by phony social justice warriors.”

Step back: S&P Dow Jones Indices said in a blog post that Tesla’s ESG standing had been affected by claims of racial discrimination and poor working conditions at its Fremont manufacturing plant.

The automaker’s handling of an investigation by the National Highway Traffic Safety Administration into fatal crashes involving its Autopilot technology has also been called into question.

“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens,” Margaret Dorn, the executive in charge of ESG indexes for North America, wrote in a blog post.

My thinking: The claims made against Tesla in a lawsuit from the state of California are shocking. The Department of Fair Employment and Housing said it found evidence that the Fremont factory “is a racially segregated workplace where Black workers are subjected to racial slurs and discriminated against in job assignments, discipline, pay and promotion.” It’s not often you see formal allegations of not just discrimination, but also outright segregation at one of the most valuable companies in the world.

Yet putting aside the Tesla (TSLA) question, it’s clear that ESG investing has shortcomings and inconsistencies.

Index makers have jumped on the ESG investing frenzy to create a raft of new products they can market to clients who want to better align their portfolios with their values. But many have been making up the rules as they go. Oversight from regulators remains scant.

That leads to baffling outcomes based on convoluted ranking systems. ExxonMobil (XOM) is now one of the biggest constituents of the S&P 500 ESG index. And here, Musk has a point: Why does a massive oil and gas company hold that spot when it’s earning billions of dollars every quarter producing fossil fuels, while an electric vehicle maker is screened out? Does that really make sense?

Up next

Canada Goose (GOOS) and Kohl’s (KSS) report results before US markets open. Ross Stores (ROST) follows after the close.

Also today:

  • Initial US jobless claims for last week arrive at 8:30 a.m. ET.
  • Existing US home sales for April post at 10 a.m. ET.

Coming tomorrow: Earnings from Deere (DE) and Foot Locker (FL).