Buy these consumer stocks that may get a boost from a Fed rate cut, says Evercore ISI

Evercore ISI recommends buying discounted consumer-facing names ahead of an expected Fed rate cut, noting historical outperformance for Consumer Staples and Discretionary once easing begins. Interest rate futures price roughly a 90% probability of a 25bp cut to a 3.50%-3.75% policy range at next week’s meeting; Evercore's screen targets Russell 3000 stocks with negative YTD returns, forward P/Es below their five-year averages and forward net margins below five-year averages. The note calls out heavily sold names including Bath & Body Works (-55% YTD), Under Armour (-41% YTD) and Lululemon (-52% YTD), and cites additional tailwinds from last summer’s tax cuts and potential tariff rebate checks.

Analysis

Market structure: A likely 25bp Fed cut (to 3.50–3.75%) is a clear positive shock for consumer discretionary and staples via lower discount rates and cheaper consumer credit; Evercore’s backtest implies outsized 6–12 month upside for the groups. Direct beneficiaries: mass-market and branded staples (BBWI) plus high-margin lifestyle names (LULU) that can re-lever margins; losers: low-margin incumbents losing share to nimble upstarts (UAA vs ONON/HOKA) and financials if loan spreads compress. Expect modest dollar weakness and a 5–20bp decline in 2s10s real yields, supporting multiple expansion in consumer names.

Risk assessment: Tail risks include a CPI re-acceleration (>0.4% m/m) that forces Fed to pause cuts, a tariff-policy reversal that raises input costs, or continued market-share erosion at UAA—each would reprice these stocks lower. Time horizons matter: next 1–2 weeks will be driven by the cut and headlines; 1–6 months by holiday comps and tariff rebates; 6–12+ months by structural share trends and margin recovery. Hidden dependencies: inventory digestion, wholesale channel promotions, FX exposure for LULU and BBWI and dealer inventory at UAA.

Trade implications: Favor selective longs into the cut with structured entry: use 3–12 month bullish option structures to capture 6–12 month historical outperformance while capping downside. Consider pair trades that separate cyclicality from structural share loss (long LULU or BBWI, short UAA/ONON where appropriate). Hedge macro tail risk with index put spreads or short-duration Treasuries if CPI surprises.

Contrarian angles: Consensus assumes a symmetric rebound; it underrates structural brand shifts—UAA’s 41% YTD drop reflects permanent share loss risk, not just cyclical pain. Conversely, BBWI’s 55% drawdown may be overdone if margins normalize and tariff rebates hit; LULU’s 52% fall could recover faster given pricing power but remains vulnerable to FX/tariff noise. Historical parallels: 2019–20 cut cycles helped staples rebound quickly, but secular apparel losers failed to recover.

Key Decisions for Investors

• Establish a 2–3% portfolio long in BBWI (Bath & Body Works) over 6–12 months using a cost‑efficient options collar: buy 9–12 month ITM calls and sell 1–2 strikes higher to fund them; exit or cut if same‑store sales decline >3% y/y or gross margins fail to improve within two quarters.
• Initiate a relative-value pair: long 1–2% LULU (Lululemon) and short 1–2% UAA (Under Armour) for a 6–12 month horizon to capture LULU’s pricing power vs UAA’s structural share loss; add stop-losses of 12–15% and reduce pair if LULU’s U.S. comps remain negative for two consecutive quarters.
• Add a 3–5% overweight to consumer staples via XLP or individual defensive names for 6–12 months to capture historical post-cut outperformance; hedge 30–50% of that notional with 3–6 month S&P put spreads if headline CPI prints >0.3% m/m.
• If conviction is timing-sensitive, buy 3–6 month call spreads on BBWI or LULU (debit spread) ahead of the Fed cut to capture an expected 10–25% re-rate, and cap downside with a purchased protective put that costs no more than 2–3% of position notional.
• Monitor three triggers within 30 days: (1) Fed confirmation of 25bp cut (trade initiation window +0–5 days), (2) US CPI >0.3% m/m (tighten hedges or reduce longs), and (3) company-specific holiday sales guidance (if misses by >2–3% revert to neutral/short).