Retail stocks typically beat the market after Fed cuts rates. Telsey gives top ways to play

A swathe of retailers and home improvement stocks could outperform over the next year as the Federal Reserve begins its interest rate-cutting cycle. CEO and chief research officer Dana Telsey pointed out that retail stocks on average beat the S & P 500 in the nine months after the U.S. central bank begins to ease monetary policy. Specifically, she said the S & P 500 consumer discretionary sector has beaten the broader market in seven of the last nine easing cycles during that first-nine-month window. “Similarly, we found that retail stocks outperformed the S & P 500 Index in eight of the last nine easing cycles over 12 months from the first rate cut,” Telsey wrote in a note. The Fed last week began its rate-cutting campaign with an aggressive half percentage point reduction. It’s the first rate cut since March 2020. Fed rates not only set short-term borrowing costs for banks, but also help determine mortgage, auto loan and credit card rates. “The rate cuts should support the labor market and wage growth while stimulating spending in housing and durables,” Telsey said in a Monday note. “We also expect the rate cuts to improve consumer credit and support consumer confidence.” The firm identified several stocks that could benefit from the Fed starting its easing cycle, based on three scenarios: If disposable income improves for the middle-income and “mass consumer”; If sentiment improves among middle-income consumers considering, or are already, financing a large purchases; If the higher-end consumer sees “improving sentiment from equity markets and/or improving housing market conditions.” Take a look at some of the stocks that made the list. According to the firm, shares of a few major discount retailers should outperform if middle-income consumers see higher levels of disposable income. The firm named discounters Dollar General and Walmart among the beneficiaries, assigning the stocks price targets that imply 19.8% and 3.7% upside, respectively. Dollar General shares have plummeted more than 36% this year as the lower-end consumer faces inflation and the company deals with inventory problems . Walmart , meanwhile, is up roughly 52.2%. Home improvement retailers such as The Home Depot , Lowe’s and Floor & Decor Holdings stand to benefit from improved sentiment and disposable income among consumers that have already made, or are considering making, a financed purchases, according to Telsey. Shares of Home Depot and Lowe’s are up roughly 12.9% and 17.2% this year, respectively, as the prospect of lower interest rates boosts consumer sentiment. Higher rates had put off many consumers’ decisions to buy and sell homes and to borrow money for bigger home renovation projects. Given this trend, Home Depot had said in August that it expects full-year comparable sales to decline by 3% to 4% compared with the prior fiscal year. Tech products seller Best Buy could also get a boost from improved middle-income consumer sentiment, Telsey forecasts. If the rate-cutting cycle boosts sentiment among higher-end consumers, Telsey expects consumer retail names such as Williams-Sonoma and German sandal company Birkenstock to outperform. The stocks could gain 14.8% and 3.6% over the next year, respectively, according to the firm’s price targets. Williams-Sonoma shares are up a whopping 50% this year and nearly 13% this month. To be sure, analysts polled by LSEG expect shares to pull back nearly 5% from current levels. The consensus rating on the stock is also a hold.