By Jacob Sonenshine

Retail stocks have jumped and they are close to breaking above key levels.

The SPDR S&P Retail ETF -- which owns a fairly equal amount of stock in retailers such apparel stores, dollar stores, and auto part dealers -- has gained just over 6% to about $79 in November.

That is a key level. The high 70s is roughly where sellers have come in since early 2022 to knock the price lower.

Around that time, the Federal Reserve began lifting interest rates to cool the economy, and some retailers were hit hard. Carvana almost went bankrupt (its stock is still below its record high), and Victoria's Secret has struggled with declining same-store sales.

But now, "XRT [is] finally looking ready to breakout of range," writes Jeff deGraaf, head of technical research at Renaissance Macro Research.

The fund is near the higher end of its recent range of roughly $70 to $79 since the start of the year, deGraaf highlights. Buyers have consistently come in to support the price at $70, and now the price is knocking on the door of a level above this range.

This signals market participants are becoming more willing to buy at higher price levels, something that only happens when investors and traders see something changing for the better.

The catalyst this time is the outcome of the November election. With Republican Donald Trump winning another term as president and the GOP in charge of Congress, it is likely Trump's proposals will be passed by lawmakers.

The president-elect campaigned on cutting individual tax rates, which would free up spending money for consumers and lift sales and earnings for retailers. It also could stoke some additional inflation and prompt the Fed to rethink the number of interest rate cuts. But in the near-term, higher rates might not matter much for retail stocks if consumers spend more money because of some combination of more items bought and higher prices for products.

Retail sales growth has hovered around 2% this year versus last year. The market wants to see that type of growth next year, and right now, analysts are forecasting companies in the fund will produce 2.8% revenue growth in aggregate next year, according to FactSet.

That would spur decent earnings growth. Analysts expect a slight uptick in net profit margins, as product costs have risen a bit less than prices and expenses such as employee pay, depreciation, and interest expense are unlikely to balloon. Analysts are modeling 9% earnings per share growth next year in aggregate, to $5.46, for the retail ETF.

As long as companies provide guidance in the fourth quarter confirming that growth, the stocks can move higher. The retail fund trades at just 14.5 times expected EPS for 2025, about two thirds of the S&P 500's 22.3 times.

Over the past decade, when retail was more in favor with investors, it has tended to trade almost in-line with the S&P 500. So if retail earnings multiples are unlikely to go much lower, then rising earnings on the back of strong consumer spending would bring the stocks higher.

It starts with first quarter or full-year 2025 guidance on companies' coming third- and fourth-quarter earnings calls.

In December, Victoria's Secret will report third quarter earnings, but its fourth-quarter outlook will still be important, as analysts start to assess next year's earnings. Dollar General and Dollar Tree will both report third-quarter earnings in December. TJX Companies will report on Nov. 20.

Write to Jacob Sonenshine at jacob.sonenshine@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

November 15, 2024 15:27 ET (20:27 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.