By Sabrina Escobar

Home Depot's fourth quarter-earnings report is slated to reignite a debate that has been raging among investors for the better part of the past two years: Is home improvement demand finally rebounding -- or will 2025 be another tough year for the sector?

The retailer reports results on Tuesday morning. Shares have shed 1.7% this year as investors grapple with the home improvement quandary. The S&P 500 has gained 1.7% over the same period.

Consumers tend to start remodeling projects just before selling a house or right after buying one. With mortgage rates at their highest point in years, many potential buyers have put off purchases. Toward the end of 2024, the outlook was cautiously optimistic: The Federal Reserve was on track to keep lowering interest rates, which analysts hoped would also decrease mortgage rates and kick-start the housing market.

The economic picture is looking markedly different in the early days of 2025. Given the recent spike in inflation, economists project the central bank will keep rates higher for longer. That could further delay the much-needed rebound in home sales and home renovations, more bearish analysts point out.

"Compared to buy side consensus, we are more cautious around how quickly home improvement demand will recover," writes Zhihan Ma, an analyst at Bernstein. "Given policy uncertainties and a potentially higher rate for longer environment, we don't expect a meaningful rebound in [Home Depot's] and [ Lowe's] comp sales growth to the 3.5%-4% range until FY26."

Ma has an Outperform rating on Lowe's stock and a Market Perform on Home Depot stock.

Consensus estimates are calling for Home Depot's same-store sales to decrease by 1.5% year over year, according to FactSet. Net sales are projected to fare better, growing by about 13% year over year to $39.2 billion thanks to increased demand stemming from last fall's hurricane recovery efforts. Wall Street expects adjusted earnings per share to come in at $3.04.

In past quarters, the retailers have opted to strike a cautious tone about the pace of recovery in home improvement in a bid to temper investor enthusiasm and set realistic expectations. Markets will be closely monitoring any changes to management's commentary this earnings season, hoping they take a more upbeat tenor.

Bulls are betting a rebound isn't far off. Telsey Advisory Group analyst Joseph Feldman thinks the housing market will pick up speed this spring as buyers adjust to higher rates and monthly payments, an observation shared by real estate agents. Home improvement should also get a lift from ongoing appreciations in home prices, which is one of the leading drivers of home improvement spending, Feldman added. He has an Outperform rating on Home Depot shares.

Some analysts, such as Morgan Stanley's Simeon Gutman, are happy to bide their time for the inflection point. Gutman acknowledges that the industry is currently at a "cyclical bottom" and that demand may be below average in 2025. But he reiterated Overweight ratings for both Home Depot and Lowe's ahead of earnings, noting that in the long run, home improvement should benefit from a pent-up demand for housing, as well as the age of the currently available housing stock.

"Both HD and LOW are two of the best-positioned retailers in our coverage to benefit from a housing rebound," Gutman said.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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February 24, 2025 16:46 ET (21:46 GMT)

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