Two of America’s largest home improvement retailers, Home Depot (HD) and Lowe’s (LOW), are expected to report fiscal Q1 2022 earnings next week. Ahead of these earnings releases, a recent Bank of America (BAC) Global Research report suggests a positive outlook for the performance of the two companies.

“Recent signals of home improvement retail activity from the US Census Bureau, SpendTrend, and BAC aggregated credit & debit card data have indicated that YoY growth in industry spending at retail was solidly positive in February, and softened in March and April as last year’s stimulus-boosted spending surge was lapped,” the report reads. “We expect this deceleration to be widely understood by the investment community, and therefore [do not] expect negative stock reactions to the companies’ commentary around the quarterly cadence.”

The report noted that, when comparing current home improvement retail spending trends to pre-pandemic levels, the three-year growth rate accelerated in the first quarter of 2022 versus the fourth quarter of 2021.

BofA maintains a Buy rating on the stocks of Home Depot and Lowe’s, with price targets of $392 and $292, respectively, based upon their 2022 EPS forecasts for both retailers. BofA analysts estimate a 24x 2022 EPS for Home Depot and 21x for Lowe’s — both above the hardline retail average of 15x — citing resilience of the home improvement industry and strong fundamentals.

“Upside risks to our PO are improving consumer sentiment and other macro metrics tied to renovation spending, better-than-expected margin expansion from sales growth coupled with cost-saving and productivity initiatives, and upside from favorable weather events,” the report said of Lowe’s. “Downside risks to our PO are rising interest rates which may continue to dampen investor sentiment towards housing, a slower than expected improvement in comps, and slower than anticipated progress towards margin improvement goals.”

However, the possibility of a weakening housing market amid rising interest rates and surging materials prices could pose a significant threat to home improvement retail. In addition, sustained supply chain challenges are continuing to place pressure on homebuilders and retailers alike.

In any case, the housing market is beginning to show signs of cooling. And while it is still expected to stay hot in the coming months, rising mortgage rates and inventory should serve to bring down prices and demand. New privately-owned housing starts also remain on an uptrend, having recovered well past pre-COVID levels. The road ahead for home improvement retail ultimately lies in how dynamics in the housing market play out over the rest of the year.

“Downside risks to our price objective are a weakening in the housing market beyond our forecasts, deterioration in the competitive landscape, unfavorable weather and poor execution in supply chain upgrades,” BofA said of Home Depot. “Upside risks are a noticeable acceleration in the housing market or further acceleration in same-store sales trends as HD continues to take market share.”

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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