By Teresa Rivas

Less than a month ago, retailers seemed set to reap the gains of higher tax returns, but the war in Iran drastically altered that picture.

The State Street SPDR S&P Retail exchange-traded fund has sunk some 10% since the war began, more than twice the S&P 500's decline, as investors fear that higher gasoline prices will hurt consumer spending. With the war in its third week, hopes for a speedy conclusion have faded.

The result? "A sluggish U.S. consumer faces a global oil shock," as TD Cowen Chief U.S. Macro Strategist Oscar Munoz writes.

The anticipated bump in tax refunds was important because consumption has been cooling, with real spending up just 0.1% month over month in both December and January, and February might not be much better.

"Downside risks are also starting to mount," Munoz writes, citing a slowing labor market and equity market declines that may even hurt more insulated, high-income consumers. "Moreover, the ongoing conflict in the Middle East is already hitting sentiment, and real incomes will be dented in the near term owing to strong inflation."

In fact, "demand destruction has begun" already in Asia and Europe, from industry to airlines, as J.P. Morgan's Natasha Kaneva writes.

The effect hasn't been as dramatic in the U.S. However, the longer gas prices stay high, the more damage is inflicted, while disruptions to fertilizer supplies mean food prices spike.

Corn has jumped to its highest level since June, and "the farmer needs much higher crop prices from here to offset costs rising aggressively for diesel and fertilizer," as The Boock Report's Peter Bookvar puts it. "That won't be good for consumers."

It's obviously not been good for the stocks either. That's particularly true because in the inflation age, many companies are reluctant to raise their prices immediately. Profits may take a near-term hit to avoid giving shoppers sticker shock.

"The path of impact typically moves from costs to margins before demand, creating clear winners and losers...with pressure cascading from services to supply--chain--heavy discretionary models, while asset--light or near-shored businesses remain more insulated," write Jefferies consumer analysts, including Blake Anderson.

He is concerned about department stores and companies in the midst of turnarounds including Kohl's, Macy's, V.F. Corp. and Capri Holdings, while companies with stronger pricing power, higher direct-to-consumer sales and higher-income shoppers -- like LuxExperience, Tapestry, Deckers Outdoors, and Ralph Lauren -- seem more insulated.

A good deal of retailers may be oversold given that fully half of Consumer Discretionary stocks are in a bear market, as analysts at SentimenTrader note.

And there is a bit of a silver lining, the firm writes: No one knows how long the oil shock will last, but history says that "when this extreme washout occurs, the State Street Consumer Discretionary Select Sector SPDR ETF has achieved an 82% win rate over the subsequent year." Breadth indicators corroborate "this extreme oversold condition, supporting a bullish medium-to-long-term outlook for both the sector and the broader market."

The near-term outlook is much cloudier though.

Write to Teresa Rivas at teresa.rivas@barrons.com

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March 19, 2026 15:26 ET (19:26 GMT)

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