Why Home Depot Stock Pulled Back Today

The hot inflation report weighed on the home improvement retailer.

Shares of Home Depot (HD -3.00%) were moving lower today as the home improvement retailer responded to the hotter-than-expected inflation report this morning.

As the nation’s leading home improvement retailer, Home Depot has significant exposure to the housing market, and the higher-than-expected inflation reading means that mortgage rates are less likely to come down soon, making a housing recovery less likely.

As a result, the stock was down 2.9% as of 3:20 p.m. ET, compared to a 0.9% decline for the S&P 500.

Image source: Home Depot.

Why inflation is a problem for Home Depot

Home Depot’s business boomed during the pandemic as the stay-at-home effect led Americans to spend more on home improvements, but the impact of soaring interest rates has cooled off the housing market and, in turn, demand for home improvement products.

Home Depot’s revenue and profits both fell in 2023, but investors were hopeful that a decline in interest rates would spark a recovery in home improvement demand.

Now that seems less likely as consumer prices rose 3.5% from a year ago in March, still elevated from the Fed’s long-term target of 2%.

What’s next for Home Depot stock?

Today’s news also comes just two weeks after Home Depot announced the biggest acquisition in its history: buying SRS distribution for $18.25 billion. That acquisition will be paid for in part with debt, which will add to the interest expense, which finished 2022 at nearly $2 billion.

Even for a company the size of Home Depot, that puts a dent in its earnings, and with an acquisition pending, the company would benefit in multiple ways from lower interest rates.

Expect the stock to struggle to return to full strength until the housing market is healthy again, and that will likely require a meaningful decline in interest rates.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.

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