"The best laid plans of mice and men often go awry," the poet Robert Burns wrote centuries ago.
And so it seems for retail stocks, as what seemed like a perfect setup turned into a perfect storm for the industry. Yet investors shouldn't count them out yet.
Between the expectation for higher tax returns and potential interest rate cuts, " 2026 was set up to be 'the year of the consumer,'" as Bernstein analyst Zhihan Ma puts it.
Of course, neither of those materialized: The increase in tax refunds was much smaller than anticipated, and the market is now worried about the chance of interest rate increases after the Iran war caused energy prices, and by extension inflation, to spike. The average price of gasoline has come down from its highs, but still sits at $3.86, well above where it was before the conflict began.
All of this makes it tricky to predict how the second-quarter will go for retailers. After all, consumers are still spending, but some of that could reflect the temporary boost of tax cuts, and with savings rates down, some strategists see this resilience as unsustainable outside of the higher-income cohorts driving spending.
For her part, Ma warns that inflation will still be a headwind, as "the second degree impact has yet to play out." She cites packaging costs (as measured by plastic and resin), which jumped 18% year over year last month, and fertilizer costs, which soared as much as 50% this spring.
"These, combined with a potential new round of tariffs, suggest that inflation is here to stay," she writes in a note Monday. "Lower income consumers have experienced below-average wage growth but above-average inflationary pressure. It also doesn't help that the Big Beautiful Bill further reduced benefits for lower income consumers...we expect low income consumers to remain under pressure while middle to high income consumers to trade down to seek value."
Consumer sentiment is near-all time lows--even declining among wealthier Americans--and declining gas prices can only do so much, since cumulative inflation since January 2019 stands at 33% overall, led by inflation in energy and food, Ma notes.
Therefore her top picks for the second quarter are those that cater to bargain hunters.
Costco Wholesale is one, and she sees its ongoing strong comparable sales and the potential it will issue a special dividend supporting the shares near-term. Dollar Tree is another: The shares are down because investors are worried about its low-income shoppers, but Ma thinks that's largely baked into the stock, while it doesn't reflect increased traffic from middle- and higher-income consumers trading down.
Dollar Tree isn't alone in its recent underperformance; in fact Costco and Target were the only retailers in Ma's coverage to outperform the S&P 500 in the first half of the year; the State Street SPDR S&P Retail exchange-traded fund and the State Street Consumer Discretionary Select Sector SPDR ETF have both badly lagged behind the broader market in 2026.
However, 22V Research President Dennis DeBusschere wrote over the weekend that retail is due for a "catchup," boosted by artificial intelligence.
"Retail fundamentals strengthened meaningfully in the first-quarter earnings season," he notes, as more than 85% of XRT stocks delivered earnings beats. More than 70% logged better-than-expected sales, and with operating leverage returning to normalized levels postpandemic, sales beats are once again becoming a more reliable indicator of upside earnings surprises.
At the same time, AI-driven e-commerce sales are expected to be over $2 trillion next year and nearly $2.6 trillion by 2030, he notes.
Retailers actively using AI in their businesses include the usual suspects like Amazon.com and Walmart, but also eBay, Etsy, Academy Sports and Outdoors, American Eagle Outfitters, Macy's, Dollar General, Urban Outfitters, Best Buy, Chewy, and Instacart owner MapleBear, among others.
"AI users are thus the leading edge of the margin recovery underway across XRT," he writes, and the stocks should eventually reflect that.
That would be a welcome change of pace.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 29, 2026 14:28 ET (18:28 GMT)
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