Why Home Depot Is Sinking Today

A closely watched government inflation gauge came in hotter than expected in January, fueled in part by an uptick in housing costs. If the trend continues, it could put a damper on housing sales and home improvements.

Investors are reading the data as bad news for Home Depot (NYSE: HD), sending the home improvement giant's stock down 3% as of 10:30 a.m. ET.

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A sluggish outlook

The housing sector is closely linked to interest rates. For most families, buying a house -- or doing a major remodeling project -- can be the largest single expense in their lifetime. So, when rates are higher, construction and renovation activity tends to decline.

Rates moved higher last year as part of the Federal Reserve's effort to fight inflation. There were hopes coming into 2025 that the work was done and interest rates would move lower in the new year, but recent data has thrown that forecast into doubt.

On Tuesday, the Bureau of Labor Statistics said that the core price index rose 0.5% in January, the most since August 2023. A range of household expenses including gas and groceries helped fuel the gains, but shelter accounted for about 30% of the rise.

One month's data isn't enough to set policy, but if the trend continues, it would make the case for the Federal Reserve being more conservative in the months ahead. Post report, financial markets were pricing in one rate cut in 2025, down from two cuts prior to the release.

Shares of Home Depot, one of the largest sellers of materials for the home construction and home renovation market, got caught up in the market downdraft following the release.

Is Home Depot stock a buy?

Two things can be true at once: Home Depot is both a best-in-class retailer with a bright future, and it's a company caught in a difficult macro environment. But even in a difficult operating environment, Home Depot is a cash-generating machine, and management has returned much of that cash to shareholders in recent years via dividends and by reducing the share count by 8%.

For those with a long-term mindset, the quality of Home Depot is the important thing to focus on. Buying Home Depot now should pay off over time.

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Lou Whiteman has positions in Home Depot. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.