Home Depot margin hits five-year low as stock lags market

Home Depot (HD) stock has declined 12.6% over the past month, a drop that exceeds the 0.3% slide in the S&P 500. The decline occurred without specific company news, leaving investors to assess the risk of the stock against a backdrop of shrinking profitability. The company's operating margin, defined as the share of sales remaining after operating costs, has fallen for three consecutive years.

The margin stood at 14.9% three years ago and is now 12.4% over the last twelve months. This current level represents a five-year low, meaning Home Depot is less profitable today than it was during previous market shocks. Management has forecast an operating margin of 12.4% to 12.6% for fiscal 2026. Meeting the lower end of this forecast would keep the margin at its recent trough, while any figure below 12.4% would indicate further erosion in profitability.

Revenue and debt levels do not appear to be driving the current pressure. Home Depot reported revenue of $169.2 billion over the last twelve months, an increase from $165.1 billion a year earlier. The company's debt is 22.3% of its market value, a figure close to the 21% average for the S&P 500. However, the company faces headwinds in its core housing exposure. During an earnings call on August 18, 2026, management stated that housing turnover has remained at historical lows for four years and that larger discretionary projects continue to face pressure.

Historical performance suggests the stock tends to fall slightly more than the broader market during downturns. According to data tracked by Trefis, Home Depot has experienced fifteen market shocks since 2007. In these instances, the stock's average decline was 16.9%, compared to a 15.8% average for the S&P 500. The most severe drop occurred during the 2020 pandemic shock, when Home Depot fell 37% from its peak, while the index dropped 34%. Another significant decline happened during the 2022 interest-rate shock, where Home Depot fell 34% against a 24% drop in the S&P 500.

Despite these drops, the stock has recovered its pre-shock highs in fourteen of the fifteen instances since 2007. The median time to recover from the low was 2.9 months, though half of those recoveries took longer. Two of the fourteen recoveries required more than a year to complete. For example, following the 2022 shock, it took Home Depot 17.8 months from its low to regain its previous high.

Investors holding Home Depot are currently betting on a recovery similar to past shocks, but they must account for the fact that those previous recoveries occurred when the company was more profitable. If the fiscal 2026 results show an operating margin below 12.4%, the historical precedent for a swift recovery may be weaker than previously assumed.