Morgan Stanley Sticks With Walmart as Inflation Shifts the Retail Landscape

Market Analysis

Walmart (WMT) endured a sharp one-day drop on May 21, 2026, sliding about 7.3% to close at $121.34 after the retailer issued a cautious outlook for the coming quarter. The decline pushed the stock more than 10% below its 52-week high and spooked investors who were expecting a cleaner beat after otherwise solid first-quarter results.

Despite the selloff, Morgan Stanley maintained an Overweight rating on WMT in a May 22 note from analysts Simeon Gutman and Pedro Gil, and left the firm's $140 price target unchanged implying roughly 15% upside from where the shares traded after the decline. The bank trimmed its earnings forecasts for the next two fiscal years slightly, but framed the changes as modest adjustments rather than a larger downgrade.

Morgan Stanleys bullish stance rests on what it calls Walmarts eCommerce "flywheel": a reinforcing cycle of online sales growth, higher advertising revenue through Walmart Connect, and rising membership income from Walmart+. All three legs of that flywheel performed strongly in the quarter. Morgan Stanley highlighted roughly 25% year-over-year growth in online sales, a 44% gain at Walmart Connect, about 28% growth in Walmart+ membership revenue, and nearly 50% growth in marketplace gross merchandise value. Together, the mix generated an estimated $1.1 billion in quarterly operating profit for Walmart U.S., with incremental operating margins around 12% as higher-margin advertising and membership revenue helped offset online fulfillment losses.

Those profitable, faster-growing revenue streams underpin Morgan Stanley's view that Walmart can convert low-price leadership into a more lucrative business over time. The investment bank's $140 target assumes investors will continue to pay a valuation premium for Walmarts low-price strategy roughly double the premium implied by the companys historical decade-long average.

Why Inflation Helps Walmart

U.S. inflation accelerated to 3.8% in April the highest reading since May 2023 driven largely by energy and food prices, according to the Bureau of Labor Statistics. Morgan Stanley sees that environment as favorable for Walmart. In the first quarter, Walmart U.S.s like-for-like grocery inflation ran about +0.6% year-over-year versus +2.5% for the broader Food-at-Home CPI, a separation of roughly 190 basis points that actually widened sequentially. In short, Walmart has been keeping grocery prices lower while many competitors pass inflation through to shoppers.

That "price gap" fuels a trade-down dynamic: higher-income households, those earning more than $100,000 a year, are now accounting for a growing share of Walmarts market-share gains, a trend that was already apparent before earnings and appears to be accelerating. As beef rose about 14.8% year-over-year and gasoline climbed roughly 28.4%, shoppers across income brackets have stronger incentives to hunt for value and Walmart is positioned to capture that demand.

Morgan Stanley also argues that Walmarts underlying gross-margin picture is healthier than headline numbers suggest. Reported U.S. gross margin moved only slightly year-over-year, but after stripping out the direct cost effects of higher fuel expenses and the impact of fresh grocery price rollbacks, underlying margin expansion looks meaningfully stronger. The mix shift toward advertising and membership both higher-margin lines is doing much of the heavy lifting.

Near-term Pressures and the Road to $140

The market reacted to a modest revenue miss on guidance for the next quarter. Morgan Stanley points to clear near-term profit drags: higher fuel expenses tied to elevated energy prices, increased associate enrollment costs for benefit programs, and medical-cost inflation affecting health insurance expenses. Those items trimmed near-term profit flow-through and helped explain the stocks sharp pullback.

For Morgan Stanleys $140 target to play out, the bank lists several conditions the market would need to accept: U.S. comparable sales accelerating to mid-to-high single digits, sustained eCommerce growth above 40%, and continued scaling of Walmart Connect and membership revenue without diluting margins. The bear case emerges if eCommerce losses re-expand or U.S. online growth slips below about 15%.

In the bigger-picture retail battle, Walmart continues to take a large share of incremental retail spending. Morgan Stanley cites Census data showing Walmart captured roughly 7.8 cents of every new dollar spent at retail in the first quarter; Amazon (AMZN) still accounts for about a fifth of incremental spending. Together, the two companies captured nearly 30 cents of each additional retail dollar, underlining the duopoly-like hold they have on incremental retail demand even as the pie gets slightly more divided.

The practical takeaway for long-term investors is straightforward. Morgan Stanley views the recent selloff as noise: the eCommerce flywheel, the widening grocery price gap, and the mix shift toward advertising and membership are intact. Walmart remains a long-standing dividend payer a 52-year Dividend Aristocrat with a conservative payout ratio that gives management flexibility to return cash while profit flow-through normalizes.

Still, valuation matters. At roughly 43 times earnings in the aftermath of the pullback, Walmart needs tangible profit improvement, not just promises. Investors weighing the stock should decide whether they trust management to widen the gap on Amazon and traditional grocers through another inflationary cycle and whether the company can sustain the high growth rates required for Morgan Stanleys target to be realized.

In short, Morgan Stanley is leaning into Walmarts structural advantages amid higher inflation but the path to the banks price target will require both continued execution on the eCommerce flywheel and visible profit delivery.