What’s the top retail debate into 2026?

Evercore ISI projects that 'Trump 2.0' policies, encompassing increased tariffs, fiscal stimulus, and corporate tax cuts, will significantly impact the retail sector. Revised tariff assumptions, including a 15% rest-of-world rate, are expected to reduce median retail EPS by approximately 8% annually, favoring auto parts and home improvement retailers while posing downside risk to discretionary softlines. Although $130 billion in consumer stimulus is anticipated, its delayed impact until 1H26 could create a consumer 'air pocket' in 2H25, exacerbated by student loan and SNAP benefit reductions. Corporate tax cuts are forecast to provide a modest 3% normalized free cash flow benefit. Consequently, Q3-Q4 2025 is identified as a critical period for monitoring potential demand softening and margin erosion due to these timing mismatches and cost pressures.

Analysis

Evercore ISI's analysis of potential 'Trump 2.0' policies indicates a period of significant divergence for the retail sector, driven by the timing and impact of tariffs, fiscal stimulus, and tax cuts. The most immediate headwind is a projected 15% rest-of-world tariff, which is estimated to cause a median earnings per share (EPS) reduction of approximately 8% across the sector. This environment is expected to favor needs-based retailers with pricing power, such as auto parts companies like Genuine Parts Co. (GPC) and O'Reilly (ORLY), and home improvement giants like Home Depot (HD). In contrast, discretionary categories including softlines, electronics, and furnishings face considerable downside risk from price-sensitive consumers. A major complicating factor is the timing mismatch between headwinds and tailwinds; while a $130 billion consumer stimulus package is anticipated, its effects are not expected until households file taxes in the first half of 2026. This delay, compounded by the near-term pressures of student loan repayments and reduced SNAP benefits, creates a potential consumer 'air pocket' and demand softening in the second half of 2025. While corporate tax cuts may offer a modest 3% normalized free cash flow benefit, the analysis suggests this will not fully offset the tariff impact, reinforcing a defensive growth stance that favors large-scale retailers like Amazon (AMZN), Walmart (WMT), and Costco (COST) due to their ability to manage cost pressures through supplier leverage.

Key Decisions for Investors

• Investors should consider reallocating capital from highly discretionary retail sub-sectors, such as softlines and electronics, towards more resilient, needs-based categories like auto parts and home improvement, which exhibit greater pricing power against tariffs.
• Exercise caution on retail sector exposure for the second half of 2025, as the lag between immediate tariff impacts and delayed fiscal stimulus creates a significant risk of demand slowdown and margin erosion.
• Favor large-scale, well-capitalized retailers like Walmart, Amazon, and Costco, as their operational leverage and ability to manage supplier costs provide a defensive buffer in an environment of price volatility and uncertain consumer spending.
• Monitor relative valuations closely, as demonstrated by Evercore's preference for Genuine Parts Co. over Sherwin-Williams, suggesting that opportunities will arise in well-positioned companies trading at reasonable multiples like GPC's 15x forward earnings.