By Teresa Rivas

Americans' outlooks for the economy are dropping, and their shopping habits are slimming down. Retail stocks are feeling the heat.

Consumer confidence fell again for the fourth consecutive month, according to the latest reading from the Conference Board. Its consumer confidence index slid 7.2 points to 92.9 for March, according to data released Tuesday.

Americans' spending remained remarkably strong in the postpandemic period, despite being frayed by years of above-average inflation. However, shoppers have become increasingly nervous in recent months, and are worried about their own finances -- as well as the broader state of the economy amid zigzagging policy and tariff threats from President Donald Trump.

That is a markedly different setup than Trump's first term as president, when a trade war wasn't the first order of business.

Another major gauge, the University of Michigan consumer sentiment survey, demonstrates how vastly different the outlook is today compared with eight years ago, Citigroup's Steven Zaccone wrote on Tuesday. After the 2024 election, consumer confidence tumbled 7.1 points below the November 2024 reading of 71.8, with three straight months of declines. Compare that to the 18-month span following the 2016 election: July 2017 was the only month during that window in which consumer confidence fell below November 2016's 93.8 reading.

The stock market's recent sudden declines may mean that any pullback might include tonier households that rarely feel like they have to budget. Citi data of stocks, bonds, and real estate show that the average household net worth's increase in the fourth quarter of 2024 was the smallest in five quarters.

"This is worth watching, in our view, because the 'wealth effect' has been a big driver of confidence for the high-income household the past few years based on strong equity returns and high housing prices," Zaccone wrote. "A potential reverse 'wealth effect' is one of the biggest risks we see for higher income households at this point if the equity market weakness and softening housing prices lasts for a prolonged period."

Little wonder, then, that investors are feeling jittery about retail's prospects. While the S&P 500 has slipped about 2% in 2025, the SPDR S&P Retail exchange-traded fund has dropped around 11%.

Although many retailers reported strong fourth quarters, reflecting a robust holiday period, shoppers moods' quickly soured. The upshot, TD Cowen hard-line retail analyst Max Rakhlenko noted in a Tuesday note, is that first-quarter fundamentals have looked weaker -- and many companies appear to be trailing consensus estimates "due to the combination of consumer pull back on heightened uncertainty alongside mostly unfavorable weather."

However much of that data predates retailers warning that they plan to raise prices to cover tariff costs, which "is the next wall of worry that we face."

That said, Rakhlenko still thinks that the outlook is bright for his top picks: Planet Fitness, O'Reilly Automotive, and RH. Barron's has highlighted auto parts retailers' defensive nature, and Rakhlenko has noted that Planet Fitness's high value proposition should appeal to budget-conscious consumers. RH is on shakier ground, given stock market declines hurt rich shoppers' appetites -- see the wealth effect above -- but he thinks that the data remain solid for the brand.

Soft line retailers, which sell things like home goods and clothing, face the same headwinds, warned UBS analyst Jay Sole on Tuesday.

"The most surprising finding in the data is the US consumers' deteriorating willingness to spend is mostly due to fears around the direction of the economy rather than issues directly impacting them today," he wrote in a note. "We believe US consumers' ability to spend remains in good shape."

Yet fat wallets won't help the stocks if shoppers don't open them, Sole said. While discretionary retailers look cheaper after their selloff -- the Consumer Discretionary Select Sector SPDR Fund is also down 8.8% this year -- they won't get much traction as long as the market remains more focused on falling sentiment versus valuation.

Sole sees winners as retailers that can "go it alone," in the sense that they don't need malls or other third parties to generate sales and consumer engagement. His favorites include footwear makers On Holdings, Deckers Outdoors, and Skechers. ( Barron's has also highlighted Deckers and On as benefiting from ongoing demand.)

The reality is that without some clarity on tariffs and what their ultimate impact will be on inflation -- as well as what Trump's major federal spending cuts and policy changes will mean for the health of the economy -- it will be hard for consumers to spend freely. The market cheered postelection on hopes that Trump would focus on deregulation and tax cuts.

Until his trade war is put on the back burner, and those two issues come back into focus, retailers and stocks will likely stay in the bargain bin.

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.

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March 26, 2025 09:09 ET (13:09 GMT)

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