There are plenty of reasons that drive Wall Street's optimism for retail stocks. With the Consumer Price Index (CPI) finally falling to 2.9%, the prospect of more Federal Reserve interest rate cuts in the near future has become a strong probability. 

This represents the first time CPI has dropped below 3% since 2021, and the welcome data is set to drive positive economic sentiment throughout domestic markets. 

Despite earlier fears over the strength of the US labor market, July figures for retail sales defied expectations to climb by 1% in a move that helped to steer more confidence toward retail stocks. 

With consensus estimates posting a far more conservative 0.2% prediction for the month due to issues like lingering inflation rates, supply chain inefficiencies, and geopolitical tensions impacting the sector, the more substantial growth figures will be a welcome sight for investors. 

Optimism has been bolstered further by Wall Street’s historical trends surrounding the US presidential election. With close-run contests between two incumbents historically driving stronger relief rallies in the wake of victory, investors could expect more outperformance taking place in Q4 as retail stocks prepare for the holiday season. 

The Return of Enthusiasm

We’re already seeing retail stocks gain plenty of attention among some of Wall Street’s biggest players. 

Bill Ackman, a hedge fund manager who’s gained a reputation for building a net worth of over $9 billion off the back of brave, contrarian investments, recently bet big on Nike (NYSE:NKE) in a move that raised eyebrows among market commentators. 

Despite Nike sinking almost 30% in the first half of 2024 owing to weakening sales, slowing demand in China, and expectations of an earning decline of at least 10% in the first fiscal quarter of 2025, Ackman’s endorsement is already showing positive signs. 

After disclosing the purchase of over three million shares in NKE at the end of the second quarter of 2024, we’ve seen evidence of a turnaround in fortunes for Nike. 

Between July 5, 2024, and August 5, 2024, Nike rallied 13.18%, indicating that a stronger end to the year could be in store for the embattled stock. 

We’re also seeing struggling budget retailers receive greater optimism among analysts. Recently, Deutsche Bank opted to maintain substantially higher price targets for convenience store stocks Dollar General (NYSE:DG) and Dollar Tree (NASDAQ: DLTR) despite being forced to cut expectations in the wake of growing competition from market leaders Walmart (NYSE:WMT).

The bank cited the retailers’ history of delivering consistent same-store sales, steady margins, low-price strategy, and store counts among their reasons for a higher Wall Street outlook. 

Innovations to Drive Brick-and-Mortar Higher

While market conditions appear more positive for retail stocks, investors can also expect to see more innovation around payment technology and in-store customer experience that could help generate more momentum for retailers. 

The age of open banking has helped to transform point-of-sale (POS) technology, which is now capable of facilitating Buy Now Pay Later (BNPL) technology seamlessly. Today, the technology is already growing to accept more cryptocurrency functionality and even biometric payments to further reduce friction throughout the purchasing process. 

Crucially, the rapid rise of generative AI is also helping to transform in-store experiences. One use case of this can be found in the ODP Corporation’s utility of GenAI across its Office Depot and OfficeMax stores. 

The technology, known as the ODP Personal Assistant, is an application that uses the same large language model features as ChatGPT to build a comprehensive retail knowledge base that helps associates access rapid answers to questions in-store. 

As retail stores have been forced to compete with digital transformation and the rise of online shopping in recent years, the ability to drive new innovations in-store could help to recapture foot traffic moving into the busy holiday season. 

The Road to Recovery

The post-pandemic landscape has been turbulent at best for many retail stocks, as inflation pressures consistently impacted consumer spending between 2022 and 2024. 

After reaching a peak inflation rate of 9.1% in June 2022 and dealing with the hawkish monetary policy of the Federal Reserve, which hiked interest rates in a bid to control inflation, many retailers have struggled to attract consumer spending in recent years. 

Evidence suggests that these challenges may be subsiding, and with evidence of investor confidence returning to embattled retail stocks, we could finally see a meaningful Santa Claus rally take place in Q4 2024. 

With election uncertainty likely to persist in the short term, a stronger relief rally could play into the hands of retail stocks as the holiday season kicks into gear. The battle against inflation has been a long one, but brick-and-mortar retailers may be about to gain a new lease of life.