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Investing.com -- Morgan Stanley has turned markedly more optimistic on U.S. retail stocks, issuing a rare double-upgrade of the Consumer Discretionary Goods (CDG) sector to Overweight as analysts argued that “we are transitioning to an early cycle environment.”
The firm’s analyst, Alex Straton, said in a note Thursday that this shift makes softlines, particularly department stores and specialty retailers, well-positioned to outperform.
The bank’s U.S. equity strategy team believes “April ’25 marked the end of the rolling recession that began in ’22,” calling it “the start of a new bull market & rolling recovery.”
The analyst believes the key ingredients of an early-cycle backdrop are now in place: “compressed cost structures,” “a rebound in earnings revisions breadth,” and “pent-up demand across previously constrained sectors.”
Straton noted that softlines stocks have historically been “early cycle winners,” with the “lowest-quality end,” department stores and specialty retail, showing the strongest upside.
To express this view, the analysts highlighted a basket approach but singled out three names as the most attractive: Gap (Overweight), Macy’s (Equal Weight) and Urban Outfitters (Overweight).
The firm said previous headwinds such as “post-COVID demand normalization, wallet share shift to services, elevated interest rates, weak pricing power, & tariff concerns” now appear largely priced in, with valuations and relative performance sitting near historical lows.
Looking ahead, Morgan Stanley expects several drivers to support outperformance, including an improving early-cycle environment, “rebounding relative earnings revisions,” “stabilizing pricing for Goods,” early signs that “wallet share shift is moving towards Goods from Services,” and less sensitivity to wage pressures compared with services businesses.
Lower interest rates and “strong household balance sheets,” particularly among higher-income consumers, should also help lift the group, the analyst said.
Morgan Stanley concluded that the sector’s “depressed sentiment/positioning” sets the stage for potential upside as macro conditions turn more favourable.