These 2 Home-Products Stocks Could Be Signaling a Recession

Investors are having a tough time getting a handle on economic and political happenings, and the net result has been weakness in key stock market benchmarks. The Dow Jones Industrial Average (^DJI 0.40%) lost more than 1% on Tuesday, and more modest losses for the S&P 500 (^GSPC 1.02%) and Nasdaq Composite (^IXIC 2.02%) showed that there weren't many good hiding places from negative sentiment on Wall Street.

Data source: Yahoo! Finance.

Macroeconomic pressures have built up recently across the economy, but one place where they've gotten concentrated early on is in housing. With rising mortgage rates making home purchases more expensive, the housing market has gone through a significant slowdown already. As investors saw today, that's having an impact on stocks related to home products, and both Home Depot (HD 0.94%) and RH (RH 2.28%) saw declines in their respective share prices. Read on to learn more about both companies.

Home Depot warns of slower growth ahead

Shares of Home Depot finished lower by 2% on Tuesday, rebounding from losses approaching 4% early in the morning trading session. The home-improvement retailer reported  fiscal first-quarter financial results for the period ended April 30 that reflected sluggish business conditions, and it warned that the future could see further weakness.

Home Depot's financials for the quarter were relatively discouraging. Revenue fell 4.2% year over year to $37.3 billion, failing to meet even the modest expectations of those following the home-improvement stock. Average spending per customer held up reasonably well, but traffic levels dropped considerably to bring Home Depot's top line down. Net income dropped a steeper 8.5% from year-ago levels, weighing in at $3.87 billion and working out to $3.82 per share.

CEO Ted Decker tried to put the declines in context. Home Depot has experienced unprecedented growth in the previous three years, and so the company was expecting what the executive called "a year of moderation" in the home-improvement market. Moreover, bad weather in California weighed on results, as did lower prices for lumber products.

Home Depot updated its guidance to reflect its more somber views of how the rest of the year is likely to go. The home-improvement retailer now sees sales falling 2% to 5% in fiscal 2023, and earnings per share will drop between 7% and 13%. For those hoping that blue-chip Dow stocks would be able to hold up well even in a recessionary environment, Home Depot's results were a wake-up call that even some big companies aren't immune to weaker economic conditions.

RH loses its Buffett-stock status

Shares of RH were down more sharply, falling 9%. The luxury home-furnishings specialist didn't report financial results today, but it did lose a key source of support for its stock.

Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) posted its latest quarterly 13-F filing with the U.S. Securities and Exchange Commission (SEC), revealing the publicly traded stocks it held as of March 31. Berkshire had previously held a modestly sized position in RH shares, but as of the end of Q1, the insurance giant had sold off its RH holdings entirely. That meant a sale of 2.36 million shares, worth more than half a billion dollars at recent prices.

RH has gone through difficult times because of the economic slowdown. Even the higher-end consumers that the retailer has targeted with its upscale home furnishings and related services haven't been able to avoid the impacts on their finances.

Bulls on RH stock are hopeful that its membership model will eventually pay off, particularly once economic conditions improve. For now, though, it's hard to predict what the immediate future will look like for the company. That's likely a big part of the reason why its stock has dropped in recent months, and investors will anxiously await earnings in the next couple of weeks to see if they confirm the pressures on RH's business. If they do, it would be yet another signal that a recession might be coming in the near future.