US Retail Sales Growth and Tariff Uncertainty: A Contrarian Case for Consumer Discretionary Stocks

The U.S. retail landscape in Q2 2025 reveals a striking duality: while Consumer Staples sectors like groceries and health products surged, Building Materials and home improvement retailers faltered. This divergence, driven by inflationary pressures, wage stagnation, and trade policy uncertainty, underscores a broader reallocation of consumer demand. Yet, amid the noise of tariff-driven volatility, a contrarian opportunity emerges for investors willing to overweight agile, high-margin players in the Consumer Discretionary sector.

Retail Resilience: A Tale of Two Sectors

The latest retail sales data highlights a resilient core of consumer spending. The Control Group—a metric excluding volatile categories like autos and gasoline—rose 0.5% month-over-month in June 2025, with health and personal care products contributing significantly. This growth reflects essential spending amid inflation and tariffs, while the U-6 unemployment rate (which includes underemployment) dropped to 8.3% in July, signaling a favorable environment for cyclical sectors. Historically, when U-6 declines by over 0.5% quarter-over-quarter, sectors like Energy and Construction outperform the S&P 500 by ~12% annually.

Conversely, the Building Materials sector, still reeling from a housing market slowdown and Trump-era tariffs, saw a 2.7% monthly decline in May, with a modest 0.9% rebound in June. This underperformance contrasts sharply with the infrastructure-driven boom of 2022, when the Bipartisan Infrastructure Law fueled construction demand. The sector's struggles highlight a structural shift: consumers are prioritizing essential goods over capital-intensive purchases, a trend likely to persist as interest rates normalize.

Tariff Uncertainty and the Underreaction to Resilience

While tariffs on construction materials and imported goods have dampened demand, the market's reaction to these risks appears exaggerated. For instance, the U.S. MBA Mortgage Refinance Index hit 777.4 in August 2025, signaling a capital shift toward home improvements. Yet, investors remain cautious about the sector, underestimating the adaptability of agile players.

Consider the case of SpartanNash (SPTN) and United Natural Foods (UNFI), both operating in the grocery distribution space. Despite a 150-basis-point margin cut across the Consumer Discretionary sector due to tariffs, these companies have leveraged AI-driven supply chain optimization and regional distribution networks to mitigate costs. SpartanNash, trading at a P/S ratio of 0.09 (vs. industry median of 0.45), offers a 4.4% shareholder yield and a fortress balance sheet. Analysts, however, have assigned a “Hold” rating, with a $18.45 average price target—30% below its current $26.51 share price. This disconnect suggests the market is underpricing SpartanNash's ability to navigate tariffs through margin expansion and strategic partnerships.

Similarly, United Natural Foods (UNFI), with a P/S ratio of 0.05 and a P/B ratio of 1.02, is undervalued despite its leadership in organic and natural food distribution. The company's focus on health-conscious consumption—a trend gaining momentum as inflation drives demand for premium products—positions it to outperform peers. Yet, its EV/EBITDA of 21.0 lags behind the sector average of 13.9, reflecting a market bias toward short-term tariff risks over long-term consumer trends.

A Tactical Case for Overweighting Discretionary Names

The key to capitalizing on this underreaction lies in identifying companies with structural advantages:
1. Margin Resilience: Firms like Village Super Market (VLGE.A), trading at a P/E of 9.1 (vs. sector average of 21.8), have low debt and regional grocery models that insulate them from interest rate volatility.
2. Supply Chain Agility: SpartanNash and UNFI have demonstrated the ability to reconfigure logistics and adopt blockchain-based tracking to reduce inventory costs.
3. Consumer Behavior Shifts: The rise of e-commerce and convenience-driven spending (e.g., Amazon's extended Prime Day, Walmart's “Deals” week) favors durable goods and discretionary retailers.

Risks and Strategic Mitigation

While tariffs and trade policy uncertainty persist, the data suggests these risks are already priced into the market. For example, the Producer Price Index (PPI) rose 0.9% in July 2025, but businesses have absorbed costs through inventory management and supplier negotiations. The lagged effects of tariffs may yet manifest in consumer prices, but the Federal Reserve's cautious stance on rate cuts (and potential easing in Q4) could offset inflationary pressures.

Investors should also diversify across subsectors. Overweighting in ETFs like SPDR S&P Homebuilders ETF (XHB) and energy stocks like Chevron (CVX) complements a tactical shift toward undervalued discretionary names.

Conclusion: A Contrarian Edge in a Divergent Market

The Q2 2025 retail data paints a nuanced picture: while tariffs and interest rates weigh on construction and discretionary spending, the core of consumer demand remains robust. By focusing on companies with margin resilience, supply chain agility, and alignment with long-term trends (e.g., health-conscious consumption, e-commerce), investors can exploit the market's underreaction to regulatory risks. The time to act is now—before sector rotation and policy clarity drive a re-rating of these undervalued names.