Navigating Retail Volatility: Finding Stability in Trade-Resistant Sectors

The U.S. retail sector is in a state of flux. May 2025's retail sales data revealed a 0.9% month-over-month decline—the largest drop in over two years—amid persistent trade tensions and inflationary pressures. This contraction, steeper than the anticipated 0.5% drop, underscores the fragility of consumer discretionary spending. Yet, beneath the surface lies a critical truth: not all sectors are equally vulnerable. As trade wars and global supply chain disruptions persist, investors must pivot toward industries with pricing power, global agility, and defensive attributes. Let's dissect the data and identify where resilience lies.

Ask Aime: Which retail stocks are showing resilience in the face of rising trade tensions and inflation?

The Retail Decline: A Microcosm of Broader Challenges

May's sales drop—$715.4 billion in nominal terms—reflects more than temporary headwinds. The decline was concentrated in sectors like sporting goods (-2.5% month-over-month), department stores (data unavailable due to volatility), and clothing (-0.4%). Meanwhile, nonstore retailers (e.g., e-commerce) grew 8.3% annually, and food services rose 5.3%, illustrating a clear bifurcation in the market. Trade wars have exacerbated this divide: tariffs on Chinese imports, logistical bottlenecks, and currency fluctuations have squeezed traditional retailers reliant on global supply chains.

But this is not a new story. Since 2020, cyclical volatility has become the norm. . The chart reveals how consumer discretionary stocks (XRT) have lagged tech assets, underscoring the sector's sensitivity to macroeconomic shocks. Trade wars have amplified this divide by introducing persistent uncertainty into supply chains and pricing models.

Sector Breakdown: Where to Find Resilience

To navigate this environment, investors should focus on three pillars: pricing power, global supply chain flexibility, and defensive demand stability.

1. Tech-Driven Retail & Logistics

E-commerce and logistics firms thrive in turbulent times. Companies like Amazon (AMZN) and Shopify (SHOP) benefit from structural shifts to online shopping, while logistics giants such as FedEx (FDX) and DHL (DHLG) have invested in diversifying their supply chains. Even within traditional retail, vertically integrated players like Walmart (WMT), which control their supply chains and have global sourcing networks, outperform peers.

Amazon's 25%+ outperformance since 2023 highlights its resilience to trade disruptions.

2. Defensive & Necessity-Based Sectors

Healthcare (XLV), utilities (XLU), and consumer staples (XLP) are insulated from discretionary spending swings. For example, Coca-Cola (KO) and Procter & Gamble (PG) have demonstrated pricing power to offset input costs, while pharmaceuticals like Pfizer (PFE) rely on demand that cannot be easily curtailed.

Pfizer's 8–10% revenue growth contrasts sharply with retail's erratic trajectory.

3. Global Tech & Innovation Leaders

Semiconductors (SMH ETF) and AI-driven firms like NVIDIA (NVDA) and Alphabet (GOOG) are less exposed to trade-induced supply chain bottlenecks. Their high margins and ability to command premium pricing for cutting-edge technology make them recession-resistant. For instance, NVIDIA's AI chips are critical to industries from healthcare to manufacturing, creating a “moat” against trade tariffs.

Investment Strategy: Reallocate with Precision

The May data reinforces the need to reduce exposure to trade-sensitive discretionary stocks and reallocate capital to three buckets:

1. Tech & E-Commerce: Buy AMZN, SHOP, and WMT. Their scale and global diversification hedge against regional trade conflicts.
2. Defensive Staples: Hold KO, PG, and PFE. These companies have proven pricing power and stable demand.
3. Global Tech Leaders: Invest in NVDA, GOOG, and SMH ETF. Their innovation-driven models are less susceptible to trade-related volatility.

Avoid companies with narrow geographic exposure (e.g., Canadian lumber firms) or reliance on single markets. Monitor the trade war's trajectory——to anticipate sector shifts.

Final Caution: Stay Vigilant on Inflation

While trade wars dominate headlines, inflation remains the silent killer. The May data's nominal growth (3.3% year-over-year) masks a harsh reality: real retail sales (adjusted for inflation) have stagnated since 2021. Investors must prioritize firms with true pricing power, not just nominal revenue growth. For example, Tesla (TSLA) has raised prices multiple times without losing demand, a testament to its brand strength.

Conclusion: Build Portfolios for Resilience, Not Momentum

The retail decline of May 2025 is not an anomaly but a symptom of prolonged trade tensions and supply chain fragility. Investors should abandon the chase for high-risk discretionary gains and instead anchor portfolios in sectors that thrive in uncertainty. Tech-driven businesses, global innovators, and defensive staples offer stability in an unstable world. As trade wars persist, the market will reward those who see beyond the headlines and invest in what truly matters: adaptability and pricing power.

Action Items:
1. Reduce holdings in trade-sensitive retailers (e.g., Target (TGT), Kohl's (KSS)).
2. Increase allocations to AMZN, WMT, and SMH ETF.
3. Maintain core positions in KO and PFE for defensive ballast.

Stay disciplined, and let resilience—not reaction—guide your portfolio.