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Higher mortgage rates will eventually eat into

Home Depot's

(HD) - Get Home Depot, Inc. Report

business as the rate at which people move decelerates, Goldman Sachs argued in downgrading the stock to in line from outperform.

The brokerage also said it's "guarded" about the hardware and home-furnishings chain's long-term outlook and the threat represented by

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Lowe's

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, its chief rival, moving into urban markets.

The shares were off 90 cents, or 2.7%, to $32.85 in Instinet premarket trading.

Goldman, which dropped its coverage view on the hardline retail sector to cautious from neutral Tuesday, said Home Depot isn't likely to see any upside to its valuation in the near term.

"We are likely early in this move," Goldman said. "Business trends have clearly improved for Home Depot, and we are actually raising our 2003 forecast by 4 cents to $1.77, but the market should be well aware of this acceleration and is likely to begin discounting near-term fundamentals if the macro backdrop does not improve."