What happened

Etsy (ETSY -2.17%) shareholders lost ground to the market on Tuesday, with shares falling 4% by 11:15 a.m. EDT, compared to a 0.8% decline in the S&P 500. The slump added to significant short-term losses for the e-commerce platform, with shares down nearly 60% so far this year.

Tuesday's decline came as investors worried about Etsy's upcoming earnings report, slated for Wednesday afternoon.

So what

Walmart said in an earnings update on Monday that the consumer-spending environment is getting worse right now. Inflation is pressuring consumer confidence, according to executives, leading to more price cuts. Walmart reduced its earnings outlook this week after lowering it back in May.

Etsy doesn't compete directly with Walmart and doesn't face the same inventory risks. Yet its business will be sensitive to the types of issues that Walmart has described.

The platform grew sales volumes at just a 3.5% rate in Q1, after all, and management said that the slowdown was partly caused by "macroeconomic headwinds." Investors are worried that these pressures accelerated in Q2 and that Etsy might have bad news to report on that score in its update on Wednesday afternoon.

Now what

Heading into the report, most investors are looking for sales volumes to land between $2.9 billion and $3.2 billion in Q2. Wall Street believes Etsy can grow overall revenue by about 7% in 2022, following a 35% spike in 2021.

It seems likely that a consumer-spending slowdown will continue pressuring the business throughout the rest of 2022. Yet the stock-price decline in the past year already reflects expectations that Etsy's earnings will expand more slowly in 2022 and 2023 than they did in earlier phases of the pandemic.

To judge whether Etsy is losing any of its competitive edge, meanwhile, watch for changes in the buyer pool, which expanded at a robust 5% last quarter. Continued modest gains there can power increasing earnings, even if consumers become more cautious in their shopping choices.