Retail Stocks Need Unlikely Holiday Miracle to Save Rough 2025

A week of big-box earnings indicates US consumers are retrenching ahead of the holidays: Target cut prices to clear inventory at the expense of profits (shares recovered late in the week), Home Depot cut its outlook as homeowners postpone big-ticket projects, and Walmart’s growth has been concentrated in groceries and bargain-seeking mid- and higher-income shoppers rather than broad discretionary strength. The backdrop is a bifurcated retail market—off-price and dollar stores are outperforming while the S&P Retail Select Index is flat and several marquee names are deeply down (Target -35%, Bath & Body Works -62%, CarMax -57%)—and consumer sentiment is near record lows per the University of Michigan. With inflation remaining sticky, retailers are marking down inventory, compressing margins and raising the risk of slowing revenue growth even as the Fed may be reluctant to cut rates; upcoming results from Best Buy, Dick’s, Abercrombie, Urban Outfitters and Macy’s will be key signals for holiday demand, which the NRF still expects to top $1 trillion but Morgan Stanley’s survey shows much weaker year-over-year spending momentum (net +6% vs +14% prior).

Analysis

A week of big-box earnings shows US consumers retrenching ahead of the holidays: Target disclosed price cuts that protected sales but squeezed profits and recovered late in the week, Home Depot cut its outlook and fell more than 5% over five days, and Walmart’s recent rally reflected growth concentrated in groceries and mid-tier/higher-income shoppers rather than broad discretionary strength. University of Michigan consumer sentiment slid to near the lowest on record, and the S&P 500 is down 3.5% this month, on pace for its worst November since 2008.

The market is bifurcating: off-price and discount channels (TJX, Ross, Dollar Tree, Dollar General, marketplaces like eBay and ThredUp) are outperforming as consumers trade down, while the S&P Retail Select Industry Index is flat for the year and marquee names (Target -35%, Bath & Body Works -62%, CarMax -57%) show material downside. Retailers are marking down excess inventory to spur demand, boosting promotional intensity ahead of the season.

Sticky inflation and weakening incomes threaten margins and could keep the Fed from cutting rates even as the labor market softens; Bloomberg Intelligence flags persistent price pressures for discretionary and staples. Upcoming results from Best Buy, Dick’s, Abercrombie, Urban Outfitters and Macy’s are pivotal near-term catalysts to confirm whether holiday sales can offset margin erosion.

Key Decisions for Investors

• Reduce relative exposure to discretionary retailers that reported margin erosion or lowered guidance (e.g., Target, Home Depot, deeply down names noted in the article) and consider trimming positions where markdown-driven profit risk is clear
• Increase exposure to off-price and discount operators and marketplaces showing resilient demand (TJX, Ross, Dollar Tree/General, eBay, ThredUp) as trade-down behavior is driving outperformance
• Monitor upcoming holiday reports from Best Buy, Dick’s, Abercrombie, Urban Outfitters and Macy’s for confirmation of demand trends and use those results as triggers to reassess sector positioning
• Implement downside protection (options hedges or reduced cyclicals) against further consumer-sentiment deterioration given sticky inflation and the risk of delayed Fed rate cuts
• Watch labor-market data and Fed communications closely, because persistent inflation with softening employment would prolong margin pressure and reshape retail earnings expectations