A slew of retailers will report their quarterly results this week, including Walmart (WMT), Home Depot (HD), and Target (TGT). eToro USA Investment Analyst Callie Cox and J.P. Morgan Global Wealth Management Investment Strategist Elyse Ausenbaugh joined Yahoo Finance Live to discuss what these results could tell the Federal Reserve about the consumer and inflation. Ausenbaugh notes that consumer are starting to shift their spending from services back to goods, saying it will be "an interesting dynamic to watch, both in respect to company earnings but also the inflation picture."

As for the Fed, Cox says "a September rate hike is definitely in play," but that "the data we've seen might keep the Fed higher for longer, longer than investors expect." However, Cox also notes that at its last meeting, the Fed said it would consider loosening its policy back to the neutral rate, if inflation falls enough. Ausenbaugh says that Fed Chairman Jerome Powell "has been emphasizing that, at this point, the real fed funds rate is in restrictive territory." "Inflation keeps coming down, that's going to continue to get more restrictive and it's the basis for why we think the Fed is actually probably done hiking rates at this point," Ausenbaugh said.

Video Transcript

BRAD SMITH: And when we think about so much of the retail data that's set to come forward this week, give us a little bit more glimpse of the consumer right now, a lot of us are going to be watching for what companies are guiding in this larger environment and where the spending propensity of consumers is still continuing to move forward. What are you expecting to hear over the course of this week about the health of the consumer?

ELYSE AUSENBAUGH: Look, I think at the headline-level, we are expecting to hear that the consumer still remains really strong. Their balance sheets have remained pretty insulated, even from interest rate increases, given that so many folks were able to lock in cheap financing during the pandemic era. But one thing we are noticing is a shift in the composition of that spending. We're starting to see more momentum move back towards the goods sector, which I think will be an interesting dynamic to watch, both in respect to company earnings but also the inflation picture.

JULIE HYMAN: What's also interesting about the retailers, when they report, their timing is a little bit different than the earnings reports that we've gotten thus far. So did anything change in that consumer-spending picture, given that another month added on, I guess, to the quarter?

CALLIE FOX: Yeah, they make us wait a little. But at the same time, we're talking about the second quarter here, and that's when consumer data really started to pick up. So I'm not sure if that's going to change much. It might change management guidance a little bit, Julie. But at the same time, I'm expecting those estimates coming in very low, I'm expecting those earnings to possibly hurdle those estimates, just because we underestimated the consumer so much in the second quarter.

BRAD SMITH: You put all of this together and bring it back to the Fed, too, and what their action has been thus far in trying to maintain that, consumers, even though they're continuing to spend right now, of course, there's a larger concern about where some of their policy has actually taken effect, too. And if there's anything that the Fed can pull out of this week, maybe it's not listening to, at least the same way that we do, some of the company earnings reports, but also, the retail sales data that's coming out, as well. Is there any kind of movement that you expect them to make in policy over the next couple of meetings here at this point?

CALLIE FOX: Well, I think a September rate-hike is definitely in play. But you have to kind of step back and think about the fact that rates are at 5% already. So does a 25 basis point rate hike really move the needle? Maybe not much, but it's something.

I think the data we've seen might keep the Fed higher for longer, longer than investors expect. But at the last meeting, then again, the Fed talked about, if inflation got low enough, they would consider loosening policy back to the neutral rate, if inflation ended up staying around these levels or possibly going a little bit lower. So I'm not sure what we've seen over the past month or so will really move the needle. And I think the Fed is really happy with the progress in inflation we've seen, especially on the services side.

JULIE HYMAN: On the point of what you're talking about with returning to normalization, Goldman Sachs out with the note this morning, saying they do expect some cuts, possibly next year, as we see inflation move down below 3%. And the Fed says, OK, we're too restrictive. Is that the scenario you guys are looking at also?

ELYSE AUSENBAUGH: Directionally, it is. You brought up the neutral rate, and Powell has been emphasizing that, at this point, the real Fed funds rate is in restrictive territory. Inflation keeps coming down. That's going to continue to get more restrictive, and it's the basis for why we think the Fed is actually probably done hiking rates at this point. First half of next year, we do see a scenario where the Fed could start cutting back to neutral, particularly because this potential for a soft landing scenario is, once again, back on the table. And obviously, Powell would love to pull that off, if he's able to.

BRAD SMITH: What would need to happen for them to cut? Because we've been talking to this point about the possibility of a cut, meaning that there was also something more dire that they did see in the economy that's starting to show up. So what would show up by then that's not present right now?

ELYSE AUSENBAUGH: Look, if you pick apart the inflation report that we just got last week, notice that there are still some components that are heavily driving that basket of price increases, shelter being a big one. But of course, I do think that this comes back down to the labor market. Powell has been hyper-focused on that super core measure, which is tightly tied to what's going on with wage growth. So to the extent that you see a preservation of some of the favorable labor force participation trends that we've been seeing and a cool down in demand for labor, I think that could provide the ingredients needed for the Fed to get comfortable to start cutting back towards neutral.

JULIE HYMAN: All right, let's bring all this back to stocks, because we have seen a-- not quite a rollover, but a meh performance thus far in August.

CALLIE FOX: Summer storm.

JULIE HYMAN: Yeah. Are we going to see more of that? Is there anything that's going to forestall the declines that we've been seeing?

CALLIE FOX: Well, look, so the economy still looks-- it looks pretty decent at the moment. I think that could limit any sell off we see right now. Plus, there's still a lot of cash on the sidelines.

The S&P rises an average of 43% in the first year of bull markets, or at least all the bull markets we've seen since 1950. So there's a lot of momentum driving in the bulls favor. And I think those people sitting on the sidelines, if we see prices move up or stabilize around lower levels, we could to see people start to flow back in.

BRAD SMITH: One of the areas, too, that we've been watching, even as we've got some of the logos for those retail Q2 earnings that are set to come out, is just the areas that consumers are still spending in. And if the pullback in spending on furnishings, or apparel, or electronics, if that continues, what does that mean for inventories and all of the different ways that these retailers are going to have to come and communicate to the Street that they're adjusting their own forecasting and that perhaps showing up in guidance, as well?

CALLIE FOX: Inventories have been a challenge these past two years. And I'm not sure retailers have quite gotten it right just yet. But according to margin estimates over the next year, consumer discretionaries are up near the top when you look at sector margin growth. So at least the Street thinks that they'll get it together and they could benefit from stabilizing costs. So when you think about the cost side of the equation, I think retailers could stand to benefit a little bit more than the average stock.

On the sales side sales, sales are slowing. But I also think, if you're looking at retailers, you need to look at them on a name-by-name basis, because of course, you have a bunch of different flavors. But we have a segment of the economy that's doing a lot better, that's benefited from wage growth, those younger, lower-skilled employers and consumers. So I think that could flow into some interesting names, instead of looking at the sector as a whole.

JULIE HYMAN: What about you, Elyse? Do you think that the retail sector is going to be a positive or a negative catalyst, going through the next several weeks?

ELYSE AUSENBAUGH: I would say probably a positive catalyst. But I think it's really important right now for investors to not just exclusively focus on the consumer. There's a lot happening in terms of government spending, and also on the corporate side, that could offer some tailwinds.

We're bulled up on industrials. We see the potential for tailwinds emanating from the $2.4 trillion worth of infrastructure spending over the next decade to continue to provide some support there, and also tech. I know that the sector looks overvalued right now, but there is a gap in the infrastructure available to actually enable the AI revolution, and we think that has real potential in the coming years.

BRAD SMITH: Just, lastly, on this topic, too, because it's continued to come in. Some of the analyst calls around retail specifically, where student loan repayments will start to impact the guidance for these companies that have not already disclosed or talked about it. Do you see that being a big theme that we continue to hear about as we go into some of the larger and the largest retail earnings names set to report this week?

ELYSE AUSENBAUGH: I think it certainly could be a theme. This is actually one of the things that we called out in our client note that we published on Friday as one of the dynamics that people aren't talking about enough. That certainly could slow down the consumer, but I don't think it's going to wholesale erode the resilience that we've seen, especially when you've got a labor market that is still working in that consumers favor.