By Lewis Krauskopf

NEW YORK, Nov 22 (Reuters) -The health of the U.S. consumer and the retail sector will be in focus in the coming week, as Black Friday kicks off a holiday shopping season that could shed light on how buyers are grappling with higher prices.

The benchmark S&P 500 .SPX rose 1.7% in the past week and approached all-time highs as investors digested the end of a solid third-quarter corporate reporting season. Earnings are on pace to have climbed about 9% from a year earlier.

But recent earnings from two high-profile retailers yielded sharply different prospects: Walmart WMT.N on Tuesday raised its annual sales and profit forecast for the third consecutive time, while Target TGT.N shares tumbled after it forecast holiday-quarter comparable sales and profit below estimates on Wednesday.

The holiday shopping season could give further insight on consumer spending, which accounts for more than two-thirds of U.S. economic activity. Even though inflation rates have moderated from 40-year peaks hit two years ago, higher prices are still challenging consumers, said Abby Roach, portfolio analyst at Allspring Global Investments.

"It's easy to be excited about inflation coming down year over year, but...consumers are really still under pressure, and I think that's the biggest pain point," Roach said. "Consumers are continuing to feel like their dollars don't go as far as they did."

Robust spending into year end could bolster a recent run of data that has shown a stronger-than-expected economy. While investors have welcomed signs of economic health, worries remain over a potential inflationary rebound, crimping expectations for how deeply the Federal Reserve will be able to cut interest rates in coming months.

As it stands, Americans have a more upbeat outlook for holiday shopping than in the prior two years, according to a Morgan Stanley survey of about 2,000 consumers published earlier this month, with about 35% saying they expect to spend more this season than a year ago.

"Companies could see a little more holiday cheer this year but spending isn't likely to increase across all categories as consumers remain selective," the Morgan Stanley analysts said in the report.

The holiday shopping season will also be a test for shares of retailers, which have diverged in 2024.

Among the industry's largest players by market value, Walmart is up over 70%, warehouse retailer Costco Wholesale COST.O has jumped 46%, while online giant Amazon AMZN.O, which has a diversified business that includes cloud computing, has climbed 30%.

Other stocks have struggled. Discounters Dollar General DG.N and Dollar Tree DLTR.O are down over 40% and 50%, respectively, in 2024, as analysts point to inflation particularly hitting the companies' lower-income consumer base. Shares of Target, whose weak forecast came as value-conscious consumers shopped for low-priced essentials at rival retailers, are down 12% on the year.

"Target is really struggling to find a unique identity in retail right now," said Chuck Carlson, chief executive officer at Horizon Investment Services.

The two S&P 500 sectors that include most retailers, the consumer discretionary and consumer staples sectors, are up 23% and 16%, respectively, in 2024, against a 25% rise for the overall index.

Another batch of retail earnings are due in the coming week, including reports from Best Buy BBY.N, Macy's M.N, Nordstrom JWN.N and Urban Outfitters URBN.O.

Investors will also get a fresh view of inflation, with the Nov 27 release of the monthly Personal Consumption Expenditures Price Index, which is closely followed by the Fed. The inflation gauge is expected to have climbed 2.3% in October on an annual basis, according to Reuters data.

"The economy is in a good spot. It's just more about trying to process several years of high inflation," said Michael O’Rourke, chief market strategist at JonesTrading. "From a retailer perspective, a lot of it's about making sure they're protecting their margins while trying to provide that value that's going to attract the consumer."

Reporting by Lewis Krauskopf; Editing by David Gregorio

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