By Sabrina Escobar
The oil price shock stemming from the Iran war could break consumers' post-Covid spending streak, many economists fear. But John San Marco, senior research analyst at Neuberger Berman, thinks consumers have "enough in the tank" to power through and keep the economy humming.
Few Wall Street analysts are as tuned in to the consumer economy as San Marco, who has been analyzing consumer-related stocks for most of his 22-year career. At Neuberger, which he joined 12 years ago, his coverage universe includes about 50 retail stocks, from auto-parts sellers to specialty apparel chains. When he isn't talking with executives at the companies he follows or analyzing their prospects and financials, he is advising Neuberger's portfolio managers about which retail shares deserve a spot in their funds.
Barron's spoke with San Marco on March 30 about the outlook for consumer spending, why quality stocks like Costco Wholesale and Walmart deserve their lofty multiples, and which discount retailer has been unfairly snubbed by investors. An edited version of the conversation follows.
Barron's: What were your expectations for consumer spending and retail stocks at the start of the year, and how have they changed since then?
John San Marco: I had a much more positive view than the consensus coming into the year. My optimism has been challenged by the past month's events, but I still believe the consensus is too negative.
Gas prices are up, which has a disproportionate impact on lower- and middle-income consumers. But the upper-income consumer is sitting on $15 trillion of home-equity gains, meaning gas-price moves are less painful.
Also, the market has all but given up on housing-related retailing, and that is a mistake. We are at 30-year lows in home sales. Affordability has been improving, and wages are in a good enough place to bring housing off the bottom.
Third, there is artificial intelligence. The market is running a pretty simple narrative that AI is going to kill e-commerce or certain types of businesses. A lot more nuance is called for.
The XRT, or State Street SPDR S&P Retail exchange-traded fund, is down about 2.3% this year. The steepest decline came right after the Iran war started in late February. What risks does the industry face now?
Energy prices transcend other risks. Some of the geopolitical uncertainty and transit impacts, if persistent, could have knock-on effects on consumer sentiment and transportation [of goods]. But the main question six months from now is: Will the consumer be paying $5 a gallon for gas, or $3? Higher gas prices are essentially a tax on discretionary spending power, although that is felt differently across the consumer spectrum.
Will higher energy costs dent corporate profit margins?
If the consumer proves sufficiently resilient or gas prices move back down, you'll get some spending lift. But higher crude prices would drive up costs. Businesses have already been stressed by inflation and supply-chain difficulty, so investors now know which businesses are most flexible and most able to manage these challenges.
Which businesses fit that bill?
Aftermarket auto parts is one business that comes to mind. These companies are selling an essential good, and their customers are looking for more than just a low price. They are looking for service, speed, and execution. So, if you are an O'Reilly Automotive, you are in a position to ask the consumer to pay for a high level of service. Valvoline is another interesting example. It is a small-cap company selling an essential service that perhaps the consumer can defer, but can't cancel.
Staples retailing is another interesting area. We saw companies that sell consumer staples manage the inflation surge in the U.S. effectively. I would highlight staples retailers that offer great value to the consumer, such as Costco Wholesale, Dollar Tree, and Walmart, because consumers will need to stretch their dollars even further as the higher cost of crude flows through the economy.
Valuations are high for quality stocks such as Costco, which trades for 47 times the next 12 months' estimated earnings, and Walmart, which sports a price/earnings ratio of 41.2. Are the premiums worth it?
It has become obvious since the launch of Amazon.com that there will be fewer winners in retailing. That is the justification for the winners earning high valuations. In most cases, you are getting a fair deal for what you are paying.
There are some idiosyncratic, smaller-cap companies that may offer better risk-adjusted returns. Warby Parker, which trades for 39 times estimated earnings, has exposure to smart glasses. There aren't many macro scenarios that can destroy a terrific opportunity to sell millions of units of smart glasses over the next several years.
I would also flag Floor & Decor Holdings, which sells flooring, tiles, and installation materials. People have conflated the negative housing cycle with the strength of the business; the stock now trades for 22 times this year's estimates. The moves that the company has made around its cost structure and product assortment have positioned it for accelerated earnings growth when the housing market recovers.
I would frame Home Depot similarly. The housing cycle has been so bad that it is easy for the market to miss whether a business is getting better or worse beneath the surface. Home Depot has made numerous investments to position itself well on the other side of this cycle. It has become a business with faster growth, and in the long run, a potentially higher return on capital.
Is this the year we will see a housing recovery?
The consensus view that trough levels of activity will continue is probably too pessimistic. The best ways for the housing-affordability challenge to resolve are through sustained growth in real incomes, stable or slightly increasing home prices, and interest rates falling for the right reasons.
All of those things were happening, but we have taken a few steps backward. When we get past this winter, the base case could be that activity picks up.
The retailing industry enjoyed several tailwinds coming into 2026, including larger tax refunds and easing tariff pressure. How will these play out?
The gas-price move we have seen so far has eaten up the tax benefit for about two-thirds of consumers. But higher-income cohorts will still benefit from the refund tailwind. They are disproportionately favored by the tax-law changes and less affected by higher gas prices. The implications of the continued divergence in consumers' fortunes is interesting. We try to favor names that skew a little higher-end than their closest peers, such as Home Depot, TJX Cos., and Costco.
Also, some categories such as beauty are more resilient. A retailer such as Ulta Beauty can offer the so-called lipstick-effect benefit of allowing consumers to indulge in low-cost treats. Meanwhile, Dollar Tree, if it can keep its value proposition sharp, can serve a consumer who will be more impacted by higher gas prices. Should food prices reflate, which is a reasonable assumption, the company can capture a consumer trading down who needs to stretch a paycheck further.
The beauty brands have done a good job engaging with next-generation shoppers. Which is the most important next-gen shopper now -- Gen Z, born roughly between 1996 and 2010, or Gen Alpha, born after?
I wouldn't close the book on millennials yet, especially because they have made lifestyle changes more slowly. They have been later than prior generations to form households, start families, and build wealth. There is still a tailwind around some of the affected product and services categories. Retailers such as Home Depot, for instance, benefit from that generation.
Gen Z probably has a more dynamic effect, because members of this generation are largely in the workforce now and should begin to experience early-career income gains. They are excellent precursors of mainstream consumption. By definition, younger consumers are early adopters. But we find that these generations are particularly brand disloyal.
Where are they shopping?
The brand disloyalty counterintuitively plays into Ulta, which aims to discover new brands. We have also heard from the largest general-merchandise retailers that they are seeing broader and stronger growth from what they call challenger brands, such as private labels. Private-label merchandise no longer means generic, unadorned products sitting on the shelf, but rather filling a hole in the assortment at a decent price point. That is the sense you get when you walk into a retailer with a strong private label assortment, such as Sprouts Farmers Market or Trader Joe's.
Which fashion brands are resonating with the next generation?
Often what looks like a high-quality business is really just a brand having its moment, and it is hard to know when that moment will end. One reason we like off-price retailers and TJX so much is that they can pivot into what is working and out of what isn't. They are agnostic about the health of brands.
What Abercrombie & Fitch has done under its current management team has been impressive, but it only gets harder to "comp the comp," or exceed past results with time. Victoria's Secret is earlier in the turnaround cycle. It has made sound shifts in marketing and merchandising and seems to be coming into its moment.
In all cases, pursuing the coolness factor is extremely difficult to sustain.
AI doesn't seem like a fad. What should investors track to determine whether retailers are putting AI to good use?
There has been a whirlwind of press releases and partnership announcements. The fact that AI platforms are changing exceedingly fast only makes that question trickier -- and more important.
It isn't worth tracking today's impact because that tells us very little about where we will be in a year or three or five. The retailers that use AI to help consumers get to the best price, assortment, and convenience should win.
The good news is, those are mostly the retailers that have been winning. Offering AI service to consumers adds value, as Home Depot has done with its Blueprint Takeoffs [an AI-powered service that generates materials lists from documents such as construction blueprints]. That is going to make life a lot easier for professional builders, and it could be a difficult tool to replicate. Home Depot can build and sustain an advantage there. Walmart gets a lot of credit for its AI capabilities, integration, and investment, and that is fair, too.
Which retailer is underappreciated by the market?
Dollar Tree is largely disliked by investors, with the stock trading at 15 times next year's forward earnings. People are sour on the company's transformation to a multiprice model, and there is a residual negative impact on investor sentiment following the acquisition of Family Dollar and its subsequent financial challenges. But with Family Dollar divested, the business is undergoing a positive transformation. Our work around the value that Dollar Tree offers with multiprices and the in-store execution suggests there is too much skepticism among investors.
Thank you, John.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
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April 09, 2026 15:22 ET (19:22 GMT)
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