U.S. Retail Inventories Ex Auto: Navigating Sector Divergence in a Shifting Demand Landscape

The U.S. retail sector is undergoing a quiet but profound realignment, driven by inventory adjustments and evolving consumer behavior. As of July 2025, Retail Inventories Ex Auto edged up 0.1% month-over-month, a modest rebound from June's 0.1% gain. While this aligns with the sector's long-term average of 0.29% since 1992, the underlying dynamics tell a more complex story. The data reflects a bifurcated market: resilient sectors like Trading Companies and Building Materials are gaining traction, while Discretionary categories such as Textiles and Apparel face mounting headwinds. For investors, the key lies in discerning these shifts and positioning portfolios accordingly.

Vulnerable Sectors: Textiles and Apparel in a Tariff-Driven Downturn

The Textiles and Apparel sectors have become emblematic of the challenges posed by policy uncertainty and global supply chain shifts. Tariff announcements in 2025 have compressed consumer spending, leading to a 0.4% decline in apparel sales in April and May 2025. Retailers are scrambling to shift production to Mexico, Vietnam, and India, but these transitions are costly and time-consuming, exacerbating inventory misalignment. Apparel firms with heavy exposure to imported goods are particularly vulnerable, as margin compression and overstocking risks intensify.

For example, companies reliant on Asian manufacturing hubs now face higher logistics costs and delayed deliveries, eroding profit margins. Meanwhile, lean inventory strategies have left some firms exposed to stockouts, further destabilizing their market position. Investors should approach these sectors with caution, favoring firms that leverage AI-driven demand forecasting and dynamic pricing to mitigate inventory risks.

Resilient Sectors: Trading Companies and Distributors in the Infrastructure Era

In contrast, Trading Companies and Distributors—particularly those tied to infrastructure and construction—are emerging as relative outperformers. The Building Materials sector, for instance, is benefiting from a confluence of structural tailwinds: infrastructure spending, automation in manufacturing, and sustainability trends. Demand for materials like steel, copper, and recycled aluminum is surging, driven by commercial construction projects such as data centers and logistics hubs.

Recycled aluminum, for example, is projected to meet 71% of construction demand by 2050, signaling a long-term shift toward sustainable materials. This trend is insulating the sector from broader retail inventory shortfalls. The S&P 500 Materials index (MATR) has outperformed the Consumer Discretionary index (COND) in recent quarters, with Building Materials posting an estimated annualized growth of 4.2% compared to 1.8% for Distributors.

Distributors, however, are a mixed bag. While those in Building Materials thrive, others in residential construction are struggling. Single-family home starts have dropped 14% year-over-year to 940,000 units in Q2 2025, leading to overstocking and logistical inefficiencies. Distributors are increasingly adopting AI-driven optimization tools to manage these challenges, but the sector's historical underperformance—exacerbated by high mortgage rates and speculative tariffs—remains a concern.

Strategic Positioning: Underweight Discretionary, Overweight Infrastructure-Linked Sectors

The current data underscores a clear investment thesis: underweight vulnerable Discretionary sectors and overweight those aligned with infrastructure and sustainability. For Textiles and Apparel, a cautious approach is warranted. Investors should prioritize firms with agile supply chains and AI-driven inventory systems, while avoiding those with high exposure to imported goods.

Conversely, Building Materials and Transportation Infrastructure sectors offer compelling opportunities. These industries are insulated from international supply chain risks and are poised to benefit from domestic sourcing advantages. For example, companies involved in recycled materials or commercial construction are well-positioned to capitalize on long-term demand.

The Road Ahead: Policy and Rate Cuts as Catalysts

External factors such as 2026 tariff policies and interest rate changes could further reshape sector dynamics. Potential rate cuts may favor infrastructure-linked industries with capital-intensive projects, while shifting trade policies could either benefit or penalize sectors based on their supply chain structures. Investors should monitor these developments closely, adjusting allocations to reflect evolving macroeconomic conditions.

In conclusion, the U.S. Retail Inventories Ex Auto data for 2025 highlights a market in transition. By recalibrating portfolios to underweight vulnerable sectors and overweight those aligned with infrastructure and sustainability, investors can navigate the current landscape with confidence. The key is to remain agile, leveraging data-driven insights to capitalize on divergent growth trajectories.