Rising Consumer Confidence Ahead? Here's Why Now is the Time to Buy Undervalued Retail Stocks

The Conference Board's Consumer Confidence Index has plummeted to levels not seen since the pandemic, and the University of Michigan's sentiment gauge has hit a 44-year low. Yet, beneath the pessimism lies a compelling opportunity: sectors in the retail and consumer discretionary space are now trading at multiyear lows, offering a rare chance to buy high-quality companies poised for a rebound.

The Paradox of Pessimism

Current data paints a grim picture. The Conference Board's Expectations Index—a key gauge of future spending—has collapsed to 54.4, the lowest since 2011, with consumers citing tariff-driven inflation, job fears, and recession anxieties. Meanwhile, the University of Michigan's May 2025 sentiment index hit 50.8, the second-lowest on record, as inflation expectations surged to 7.3%.

But here's the catch: markets often overreact to sentiment swings, and the current panic has created a disconnect between short-term pessimism and long-term fundamentals. Consider this:

• Tariff-driven inflation is peaking: While tariffs remain a concern, the partial pauses announced in April 2025 suggest policymakers are moving to address trade wars. A full rollback could alleviate price pressures, easing consumer anxiety.
• Discount retailers are thriving: Even in a downturn, companies like Walmart (WMT) and Target (TGT) are outperforming due to their ability to offer affordable essentials.
• Valuations are attractive: The consumer discretionary sector now trades at a 15% discount to its five-year average P/E ratio, despite healthy balance sheets and cash reserves.

The Undervalued Sectors to Watch

1. Essential Retailers with Pricing Power

Companies like Walmart (WMT) and Costco (COST) have historically outperformed in weak economic cycles. Both are insulated from luxury spending declines and benefit from rising demand for affordable staples.

• Walmart's stock price has underperformed the S&P 500 by 25% over the past year, despite its 3.2% dividend yield and 10-year average revenue growth of 4%.
• Costco's membership model provides recurring revenue streams, and its stock trades at a 20% discount to its 2024 highs.

2. Home Improvement & Auto Retailers

While big-ticket purchases like cars and home renovations have slowed, valuations are now compelling.

• Home Depot (HD) trades at a price-to-sales ratio of 1.2x, below its five-year average of 1.5x, despite its 40% market share in the home improvement sector.
• Ford (F) and Tesla (TSLA), though volatile, offer exposure to EV adoption and infrastructure spending.

3. Cyclical Consumer Brands with Catalysts

Companies with strong brands and pricing power can capitalize on eventual demand recovery.

• Coca-Cola (KO) and Procter & Gamble (PG) offer stable dividends (yielding 3.5% and 2.5%, respectively) and defensive exposure to consumer staples.
• Starbucks (SBUX) has shown resilience in downturns, with its stock down 18% from 2024 highs but still benefiting from its global footprint and loyalty programs.

Why Now?

The key is to act before the sentiment pendulum swings back. The Conference Board forecasts 1.6% U.S. GDP growth in 2025—a modest figure but one that supports recovery in consumer-facing sectors. Additionally, the Leading Economic Index (LEI) has stabilized, and the Lagging Index suggests that the economy is not yet in freefall.

History shows that consumer discretionary stocks often bottom before confidence rebounds. In 2009, for instance, the sector began to recover months before the Conference Board's index turned upward. Today, with valuations at multiyear lows and fear dominating headlines, this could be the moment to buy.

The Bottom Line

Consumer confidence may be at a cyclical low, but that creates a golden opportunity to invest in sectors that will thrive once pessimism fades. Focus on companies with pricing power, defensive moats, and valuations that reflect worst-case scenarios—not reality.

The time to act is now.