MW Could retail actually rebound in 2026? These are the chains - and trends - to watch.
By Bill Peters
The impacts of tax breaks, lower interest rates, easing inflation and artificial intelligence are in focus
Christmas shoppers navigate Saks Fifth Avenue in New York City on Dec. 24.
Beyond the biggest chains, the past few years have largely been ones to forget for retailers, as shoppers have remained wary about spending amid a battle with higher living costs.
Yet some analysts see a path toward a slightly better 2026.
Even if they still have reservations about the state of the American consumer, those analysts believe factors like tax breaks, as well as the prospect of lower interest rates and less aggressive price increases, could help give shoppers and retailers a break this year. They cited data from last month that showed better attitudes among consumers - at least among those with higher incomes.
"Combined with subdued inflation and Fed rate cuts, purchasing power strengthens, setting up retail demand improvement ahead," Jefferies analysts said in a note last month.
"Sentiment remains poor, but the relationship to retail sales appears to have diminished," they added. "Net-net, we are incrementally positive on discretionary [retail] heading into '26."
The Jefferies team said that against that backdrop, off-price chain Ross Stores $(ROST)$ was their top retail-stock pick heading into the year. They said new stores, refreshed store layouts, better marketing and better products overall were reasons to like the stock.
However, they suggested not all is well in the discount world, even as shoppers continue to look for deals amid the broader affordability squeeze. They noted that dollar-store chain Dollar Tree $(DLTR)$ faces "complexity and risk" with its efforts to sell more things at different prices, while competition from big-box giant Walmart $(WMT)$ - which is putting more "dollar" sections at the front of its stores - poses another challenge.
As for Walmart, Jefferies expects the discount giant to solidify its dominance in the retail universe through automation, e-commerce and its use of artificial intelligence. The analysts also said a low bar for Target (TGT) - which struggled to find itself last year amid the flight to value - could set the stage for a surprise rebound.
Meanwhile, Gap's $(GAP)$ efforts to get its "vibe" back and its expansion into beauty, as well as Abercrombie & Fitch's $(ANF)$ global expansion ambitions, are potential positives to watch for, per Jefferies. And new bra designs and collaborations from Victoria's Secret $(VSCO)$ could help the lingerie and sleepwear maker's turnaround, the analysts added.
In a separate note, they said adult consumers with more money and a decent entertainment pipeline should benefit the toy industry. Hasbro's $(HAS)$ "Magic: The Gathering" game franchise has "one of the best cohorts for sustained growth in 2026, despite lapping impressive 2025 results," the Jefferies team wrote.
For Mattel $(MAT)$, they said, 2026 is set to be its "biggest entertainment year since 2023, when the Barbie movie hit theaters," as it prepares for the release of a "Masters of the Universe" film set for June and a "Matchbox" movie at some point during the year. However, the analysts noted there are still questions over how much Mattel could grow sales this year; demand for classic toys like Hot Wheels has held up, but Barbie toys remain a question mark.
Since 2022, when costs for basics swelled, many shoppers have spent more cautiously. That trend has benefited the biggest retailers like Walmart, Costco Wholesale $(COST)$ and Amazon.com (AMZN), who can use their size to keep their prices low. While sneaker and clothing makers have felt the pressure, some analysts last year grew more bullish on brands like Nike $(NKE)$, which has said it is in the "middle innings" of a turnaround.
Still, there are plenty of factors to worry about heading into 2026. Economists have worried about slower hiring, the threat of tariff-induced price hikes amid an unpredictable trade backdrop, and the Federal Reserve's ability to tame inflation. And some say that the full impact of the Trump administration's aggressive deportation drive hasn't yet been felt in the broader economy.
The One Big Beautiful Bill Act legislation signed by President Trump last summer could cut trillions of dollars in taxes over the next 10 years - with the biggest financial gains likely going to wealthier Americans, although there are breaks for people in the low- and middle-income brackets. However, the bill also makes big cuts to some forms of public aid.
Analysts have said extra state and local tax deductions could help consumer spending. Barron's last month noted that Bank of America estimated that the bill would lead to a roughly 18% increase in tax refunds.
UBS analysts last month said that they expected a solid start to 2026 for companies that make and sell things like footwear, clothing and other "softline" items, based on December survey data. Those data showed that shoppers were less worried about the economy's biggest issues, though attitudes among lower-income consumers - who have been hit harder by inflation and were put at greater risk during the government shutdown - were mixed.
However, the UBS analysts said middle- and upper-income shoppers made up around 90% of spending on softline goods, with most publicly traded companies in that category catering to those income levels.
"Therefore, these consumers' willingness to spend is much more important to softline stock prices than lower-income consumer spending is, in our view," the analysts wrote.
And barring any bursting of a tech bubble, artificial intelligence will likely play a bigger role in shopping this year, as Walmart and others collaborate with OpenAI to facilitate purchases through ChatGPT.
TD Cowen analyst Oliver Chen, in an email this week, said that so-called agentic AI - or digital laborers that help humans with various tasks - could help retailers be more nimble.
"In retail, this means agents can continuously monitor sales, supply chains, inventory and consumer behavior, and autonomously adjust prices, reorder stock and tailor marketing in real time," Chen said.
"Going forward, we think AI will play a role in merchandising, labor and inventory management as well as before-purchase, during-purchase and after-purchase occasions," he added. "AI will also play a key role in store associate training, reinvesting time for more customer-facing duties and driving new purchasing journeys."
-Bill Peters
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 02, 2026 15:18 ET (20:18 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments