July retail sales is the next big economic data point. A beat could calm recession fears but hurt stocks as the Fed pushes forward on its hawkish path.

• July retail sales are the next big macro data point for the stock market to watch.
• A retail sales beat could spur the Fed's hawkishness, putting pressure on the recent rally in stocks.

US retail sales will be the next major data pit stop on the way to the Federal Reserve's rate-hike decision next month and a report that beats expectations could pull stocks downward in the short run, market analysts say.

July retail sales, due Wednesday, are projected to show continued resilience among American shoppers dealing with decades-high prices for food and other living essentials. Retail sales provide a snapshot into the consumption that drives about two-thirds of activity in the world's largest economy.

"We're in a space where good news is bad news," Keith Buchanan, senior portfolio manager at Globalt Investments, told Insider. "Good news about the economy leads the market to believe that that gives the Federal Reserve a longer leash to be aggressive on inflation," which is "problematic" for risk assets in the short-term, he said.

July retail sales from the Commerce Department are projected to rise 8.1% on a year-over-year basis, and by 0.2% month over month, according to Trading Economics. In June, 12-month retail sales rose 8.4% and 1% monthly. June's report reflected higher gasoline sales with average gas prices running above $5 a gallon.

Gas prices this week fell below $4 a gallon for the first time since early March, according to AAA.

"After a very strong July jobs report, a sharp rise in retail sales would all but confirm that the US is not in a recession," Bank of America said in a report this week. The blowout June jobs report showed the US economy added 528,000 jobs, more than double what economists had anticipated.

The July slide in gas prices serves as a tailwind for consumers to spend in other categories and there's been little sign of stress in lower-income spending patterns, the bank said.

"If the Fed still sees that we have a strong economy … they would probably be willing to continue furthering down this tightening cycle and make a Fed pivot less likely," Brad Roth, chief investment officer at Thor Financial Technologies, told Insider.

The Fed this year has hiked interest rates four times to a range of 2.25% to 2.5% and more hikes are in the pipeline as the Fed battles to bring inflation down to its 2% target. The last two rate hikes were sized at a hefty 75 basis points each.

"The market is kind of stuck between a rock and a hard place," said Jan Szilagyi, chief executive of Toggle AI, an investment research firm.

"If we also get strong retail sales numbers, I think we're gonna flip from worrying about a recession to worrying about an economy that's still running too hot. Which means that the Fed will have to be more aggressive on the tightening side," he said.

The S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite climbed this week after investors learned consumer price inflation in July cooled from June, supporting the view that policymakers may opt for a smaller rate hike of 50 basis points in September. Also, wholesale inflation fell 0.5% in July, the first decrease since April 2020.

Ryan Detrick, chief market strategist at Carson Group told Insider that stock investors have already priced in numerous Fed rate hikes and could view a solid retail sales report as a reason to push equities higher.

"If you look at the jobs numbers it looks like the economy is still doing pretty well in the midst of all the rate hikes," Detrick said. "If the retail sales numbers come in strong and healthy, that likely hammers home we're likely not going into a recession right away," he said. "There's a likelihood of another 75 basis points hike and then [the Fed] could take a breath."

Retail heavyweights Walmart, Target, and Home Depot will release second-quarter financial results next week, providing further insight into the state of the consumer.

In the medium- and long-term, positive economic data is helpful for stocks, particularly as the US could potentially log two consecutive quarters of economic contraction, said Roth at Thor Financial Technologies.

"If we can start to see a rebound in some of these leading indicators … those recession fears are going to start to ease and we'll start to see more people getting more comfortable with investing in the market again."