Morgan Stanley keeps overweight rating on Home Depot stock after Q1
I have been watching the housing market do something unusual for the better part of two years - stand completely still.
Mortgage rates stay elevated. Existing homeowners won't sell. Buyers can't afford to buy. And yet Home Depot (HD), the retailer most directly wired to housing activity, keeps the lights on and the cash flowing.
That paradox is exactly what Morgan Stanley's latest note on Home Depot is trying to explain.
The firm maintained its overweight rating and $420 price target on Home Depot (HD) in a note shared with me at TheStreet following the company's first-quarter fiscal 2026 results.
These results were, by everyone's admission, including Morgan Stanley's, unremarkable. HD is down 9.14% year to date, compared with the S&P 500's 8.58% gain, according to Yahoo Finance. The stock is being priced for a housing market that never recovers.
Morgan Stanley's thesis is that this discount is an opportunity. "A turnkey stock without the turn," the firm called it.
Home Depot's Q1 2026 results: solid execution in a frozen housing market
Home Depot reported the following first-quarter fiscal 2026 results on May 19, according to the company's earnings release:
- Net sales of $41.8 billion, up 4.8% year over year
- Comparable sales up 0.6%; U.S. comparable sales up 0.4%
- Adjusted diluted EPS of $3.43, versus $3.56 in the prior-year period
- Full-year fiscal 2026 guidance reaffirmed across all metrics
- Total sales growth guidance of 2.5% to 4.5%
- Comparable sales growth of approximately flat to 2.0%
Source: Home Depot Q1 Fiscal 2026 Results
CEO Ted Decker kept the tone measured. "The underlying demand in our business was relatively similar to what we saw throughout fiscal 2025, despite greater consumer uncertainty and housing affordability pressure," Decker said.
The EPS beat, such as it was, came from SG&A performance - approximately 40 basis points better than expected - which helped offset a gross margin decline of 77 basis points year over year, according to Morgan Stanley's note.
Related: Home Depot, Lowe's hidden anti-theft tactic angers shoppers
The firm noted that the Street mis-modeled the gross margin contraction relative to SG&A deleverage, meaning the underlying print was actually in line with Home Depot's own expectations.
Q2 2026 gross margin is expected to decline by approximately 25 basis points year over year, given the Q1 decline of 77 basis points and management's guidance that the first-half gross margin will decline roughly 50 basis points in total.
The Home Depot traffic and ticket debate: what the numbers actually say
The detail in Morgan Stanley's note that deserves the most attention is the traffic and ticket analysis.
Traffic declined 1.3% in Q1. That was a deceleration of approximately 80 basis points on the two-year stack and 20 basis points on the three-year stack. Ticket growth of 2.2% also decelerated on both stack measures. Morgan Stanley flagged this as a "slight setback" but attributed the April weakness in part to weather, according to the note.
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My review of the indexed data in Morgan Stanley's framework reveals the longer context. Ticket - the average transaction value - has reached an all-time indexed peak of approximately 40% above 2019 levels. Traffic remains in negative low-to-mid single-digit territory versus the same 2019 baseline.
This is the story of a home improvement market where people are spending more per project but making fewer trips, consistent with a housing market where existing homeowners are investing in their current homes rather than moving.
That maintenance and repair demand comes on top of the roughly four million existing home transactions still occurring annually, even in this frozen market. It's what gives Morgan Stanley confidence that Home Depot's business can grind forward, despite the lack of a housing recovery catalyst.
Why Morgan Stanley sees $420 target as achievable from stock priced for no recovery
The valuation argument in the note is the core of why Morgan Stanley remains constructive. Home Depot is currently trading at approximately 19.5 times next 12 months price-to-earnings, roughly a 7% discount to the S&P 500. Historically, the stock has commanded a 10% to 15% premium to the index, according to the note.
That gap between current valuation and historical premium is the opportunity Morgan Stanley is pointing to. The market is not pricing in the 3.7% comparable sales growth that the consensus is modeling for 2027.
Morgan Stanley's own estimates are slightly more conservative: comps of 1.4% in fiscal 2026 and 3.5% in fiscal 2027. The conclusion is the same, however. At this multiple, investors are paying for a business that never improves from here.
The $420 price target is based on approximately 25.5 times Morgan Stanley's fiscal 2027 EPS estimate of $16.42, according to the note. Any glimmer of housing market inflection, whether from rate cuts, pent-up demand release, or accelerating home turnover, would create meaningful upside from a starting multiple that already embeds significant pessimism.
Home Depot is a patient trade. Morgan Stanley is still holding.
Related: BofA sees more room for Home Depot shares
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This story was originally published May 21, 2026 at 8:07 PM.