Over the last month, we’ve hammered home a vital consumer theme ever-apparent in LikeFolio’s consumer data: the trade-down effect.

Consumers are willing to purchase a “lesser” brand or product due to its perceived value proposition. It may not have the superior brand recognition, but it does the job and costs less.

We saw this big time in Walmart’s recent earnings release. The company issued a weaker-than-expected financial outlook, stating: "While the supply-chain issues have largely abated, prices are still high and there is considerable pressure on the consumer. Attempting to predict with precision the swings in macroeconomic conditions and their effect on consumer behavior is challenging. As such, our guidance reflects a cautious outlook on the macro environment...."

But shares popped due to the company’s outperformance in grocery. Most notably, the company’s ability to attract higher-income shoppers.

The trade-down effect in action!

Higher-income customers drove nearly half of Walmart's market-share gains in grocery.

And Walmart isn’t the only retailer benefitting from a consumer trade-down.

Target posted stronger-than-expected results on Tuesday morning…albeit clearing a very low bar.

How did Target do it?

Discounts alongside a robust portfolio of consumer-loved private label brands.

Target’s high (and unchanging) consumer happiness levels are a critical clue that consumers weren’t deserting the brand.

A high level of consumer happiness is a strong, long-term indicator for Target: 68% positive, vs. WMT at 54% positive. Much of this is driven by Target's loved private-label brands, many of which serve as a lower-cost alternative for consumers. For example, its Joy Lab athleisure brand is often touted as a Lululemon dupe.

Target noted its private label brands (priced below many other national brands) grew at a faster pace than overall sales. These products served as a trade-down boost and a helpful mechanism to get consumers in the door.

While the street reacted positively to earnings, Target’s overall report echoed a similar sentiment to Walmart’s: shrinking profit margins (even lower than the prior quarter) and a conservative full year outlook as consumers pull back on discretionary spending.

LikeFolio data as a whole is shifting into a more conservative range.

Across our coverage universe, more than half of the companies we cover sit in our “neutral” range in regard to earnings score, and the bearish lean has become more pronounced.

But as a trader, it’s important to understand the macro environment we’re operating in now.

Where is the bar of expectations?

Much lower vs. last quarter.

This means that many reports, like the ones Target and Walmart issued, will be received as a win, even with conservative guidance.

We’ll be vigilant looking ahead to understand where expectations lie, and which consumer metrics will be most critical to analyze.

For now, we know:

• Inflation continues to weigh on discretionary spending
• Consumers are making strategic purchasing decisions, including trading-down for lower cost brands/products
• Happiness is an extremely useful indicator to understand if consumers are deserting a brand, or if loyalty is high enough to stick around