A popular argument that investors should buy shares of Wal-Mart ( WMT) suffered a blow to its credibility Thursday.

The theory, which made the rounds on Wall Street last year, argued that Wal-Mart must be getting ready for a big jump in its stock price, since it hasn't really budged in six years while its sales and earnings have grown steadily. People have made large fortunes by following such arguments, but in this case, the bulls ignored the many factors working against the world's largest retailer.

Economic headwinds are blowing hardest in the face of Wal-Mart's core customer. On Thursday, a Merrill Lynch analyst abandoned her bullish stance on the stock and downgraded it, citing those headwinds, along with gathering signs that the company's sales growth is petering out.

Shares of Wal-Mart were recently down $1, or 2.2%, to $44.15 after Merrill's Virginia Genereux lowered her rating on the retailer to neutral from buy. That doesn't sound terribly negative, but she also lowered her earnings estimates for the retailer for the next two years well below Wall Street's expectations.

Meanwhile, crude oil futures trading on the Nymex hit a new record at $76.90, signaling no rest for consumers from their pains at the gas pump. That pain hits the hardest in lower-income demographics that make up Wal-Mart's core customer group, and the company has been particularly outspoken about the negative effect of gas prices on its sales.

Genereux said in her report that nearly half of Wal-Mart's sales come from households earning $30,000 or less. Also, U.S. households spent an average of $4,600 on energy in 2005, up 19% from 2004.

"So while energy spending represents only about 6% of total disposable income, it is disproportionately more for a household earning $30,000 in annual income," wrote Genereux.

Even setting oil prices aside, the strength of consumer spending in the U.S. is a major concern for economists as interest rates rise and the housing market cools. Genereux believes that a sustained adjustment in the spending patterns of lower-income consumers is under way, to less discretionary spending.

Concerns about the economy have rattled the market in recent months, bringing the S&P 500 down by almost 5% since the beginning of May. If there is a slowdown under these circumstances, Wal-Mart may not benefit from people looking for cheaper goods, the way it has in the past when times get tough. This time around, the pain is widely expected to be concentrated at the low end, leaving higher-income shoppers to go elsewhere.

In addition to citing economic forces, Genereux sees weakness in Wal-Mart's sales trends. The company reported a same-store sales gain of 1.1% in June, hitting the low end of an already conservative range. On top of that, its comps this year should be getting an artificial boost of 30 to 40 basis points since it started including stores open for at least 13 months in the measure. Previously, Wal-Mart only included stores open 18 months in its same-store sales count -- a metric designed to factor out the effects of new store growth.

At Wal-Mart's new stores, Genereux sees store productivity trending lower.

"Wal-Mart's site selection process may be less rigorous than it has been historically," she wrote. "Or these stores may be proving riskier from a merchandising perspective, or may be cannibalizing existing store sales to a greater degree than expected."

All of these factors pose risks to the retailer's ability to drive sales growth in the coming years. This year, Genereux expects 9% growth in Wal-Mart's earnings to $2.87 a share, while analysts on average are looking for earnings of $2.93 a share. For 2006, she's predicting earnings of $3.14 a share -- well below Wall Street's estimate of $3.32, according to Thomson First Call.

If she's right, Wal-Mart's stock might be the only thing it has that isn't a good bargain.