Moody’s Upgrades Retail, Apparel Outlook as Tariffs Ease

On Oct. 7, Moody’s Ratings shifted its global retail and apparel sector outlook to stable, undoing a prior negative forecast. This change follows easing tariff costs and steady labor markets, as noted in the report.

The new forecast predicts sector revenue growth of between 2% and 4% alongside 0% to 2% adjusted EBIT growth over the next 12 to 18 months. The change reverses a 0.7% decline in adjusted EBIT in 2025 and a previous 2026 adjusted EBIT forecast of flat to down 2%.

Tariff Refunds and Economic Headwinds

Moody’s said tariff refunds could help offset higher energy and transportation costs, while solid household finances are supporting overall consumption. The report cautioned that uneven consumer demand, slower real wage growth, higher interest rates and geopolitical risks all pose hazards.

Moody’s noted consumer spending will be resilient but increasingly split between different income groups, with growth driven mainly by upper-income households. Lower- and middle-income households face stress from rising costs in housing, insurance, food and energy. These expenses push value- and essentials-focused spending, with affected shoppers relying more heavily on credit.

Impact on Retail Sectors

Discounters, off-price and dollar stores are expected to perform well, including Walmart and Target. The two retailers can use approximately $4 billion in combined tariff refunds to reinvest in pricing and strengthen market positions. Levi’s and Macy’s have also leveraged tariff refunds to bolster turnaround efforts.

The off-price sector’s “treasure hunt” appeal offers significant growth opportunities as price-conscious consumers turn to retailers like TJX, Ross Stores, and dollar stores such as Dollar General. By contrast, rising interest rates constrain the housing market, impacting home improvement and furnishings sectors. Moody’s projects modest growth for companies like Home Depot and Lowe’s, noting low fixed-rate mortgages may lead existing homeowners to pursue smaller projects without financing.

Challenges and Uncertainties

Lower tariff rates and refunds have reduced costs for import-dependent apparel and footwear retailers including Nike and Gap, as well as large discounters like Walmart and Target. However, the report highlighted U.S. trade policy uncertainty, particularly regarding relations with Mexico and Canada where trade agreements are under review amid raised tensions.

Sustained high energy prices amid continued geopolitical tensions may hurt discretionary consumer demand and input costs. Increased energy costs also affect freight and transportation, potentially rekindling price-raising pressure. Despite the positive outlook, the forecast could shift to negative if EBIT declines. Factors include slowing consumer spending, higher energy or input costs, weaker employment, or renewed tariff escalation.