What happened

Home Depot (HD -1.29%) shareholders outpaced a soaring market on Thursday. The home improvement giant's stock jumped 8% by 2:45 p.m. EST compared to a 4.5% spike in the S&P 500. The rally wasn't enough to put the stock back into positive territory in 2022 or to put it above the wider market's 17% loss year to date. Home Depot remains down about 25% so far this year.

Easing fears about a recession striking the U.S. economy helped push the stock higher. Investors also gained a bit more confidence about the retailer's upcoming earnings report.

So what

The main factor driving Home Depot's shares higher was news that inflation cooled slightly in October. That news helped spark a huge rally on Wall Street because it raises the likelihood that the Federal Reserve can succeed in its bid to cool the economy through policy tools like increased interest rates without tipping the country into a recession.

Investors are also looking forward to a major update from Home Depot on its third-quarter results. The company will announce its latest sales and earnings metrics before the market opens on Tuesday, Nov. 15. Wall Street is bracing for some bad news in that report, given the sharp slowdown in home sales lately. But Home Depot might have positive things to say about demand and pricing trends through late September.

Now what

The big question heading into Tuesday's report is whether CEO Ted Decker and his team see worsening selling conditions into 2023. They are currently targeting comparable-store sales growth of about 3% in 2022 and operating profit margin of 15.4% of sales. Both figures constitute wins, especially given how quickly Home Depot's revenue and annual earnings has grown over the past few years.

If the chain maintains that bright outlook next week, then the stock might continue its rally. But the bigger test will be how Home Depot's business and the wider home improvement industry adjust to a new higher interest rate environment. Investors won't have clear answers on that point until 2023, at the earliest.