Retailers started 2025 on solid ground, with total sales in the first quarter 4.1% higher than a year earlier, according to the latest official data from the U.S. Census Bureau. In March, the monthly advance of 1.4% beat expectations, with increases in almost all categories.
But amid tariff uncertainty, investors are now asking whether that growth is sustainable or if it’s just a reflection of consumers' hasty purchases in anticipation of tariff-related price increases.
Vehicle sales, for example, jumped 5.3% in March from February. For Adam Jonas, Morgan Stanley’s Global Head of Autos & Shared Mobility Research, this strength in the sector is tariff-related, and could continue for longer.
“U.S. consumers are contemplating some of the most telegraphed price increases in automotive history,” Jonas says. “The demand pull-forward for the next two months could be one for the ages.”
There are still many uncertainties around U.S. tariffs and their impacts. Several nations are engaged in trade talks with the White House and the Trump administration has signaled flexibility on its policy since it announced a 90-day pause on the implementation of reciprocal tariffs. However, the lack of clarity is affecting corporate and consumer confidence, reflecting in negative effects on the economy.
Splitting the Tariff Burden
The impact of tariffs will vary across companies and sub-sectors depending on different variables, including the retailer’s exposure to China, their inventories, their ability to reduce costs and, ultimately, the evolution of consumer sentiment this year.
In the case of softline retailers, or businesses that primarily sell merchandise like clothing, footwear, home textiles and accessories, suppliers may have shared as much as 50% of any incremental tariff burden historically. But this time, retailers and wholesale brands may need to absorb more of that weight.
Inventory Flexibility Is Key
Morgan Stanley Retail Equity Analyst Alex Straton says that retailers with the flexibility to adjust future inventory orders according to demand volatility should fare better under this uncertain scenario, especially later this year.
“Our conversations indicate that most spring and summer apparel and footwear inventory was brought in ahead of reciprocal tariffs. This means companies could enjoy relatively minimal impact to their first- and second-quarter income statements,” Straton says. “The pressure becomes more acute in the third quarter, given the possibility that tariffs will be imposed on all inventory, and the 90-day pause will have run out.”
Straton says price increases have emerged as the primary mitigation strategy as suppliers are less willing to share the tariff burden and because higher tariffs are being levied on nearly all major countries that produce apparel and footwear.
The Most and the Least Affected
Tariffs are likely to lead to significant earnings revisions by several retailers. Softline retailers could cut earnings per share (EPS) by a 35% average.
For this group, incremental tariffs are likely to drive a 1% price increase and a 3% sales volume decline this year. Hardline retailers, or sellers of durable goods like appliances and electronics, could reduce their EPS forecasts by 33%. For some companies in this group, tariffs may not result in price increases, while for others, prices could rise as much as 10%.
Among U.S. softline retailers, department stores are likely to be the most affected by incremental tariffs because their sales are concentrated in the U.S., they have high apparel category skew, significant China exposure, and lower starting operating margins.
Brands could be the least affected, as they generate more sales from international markets, have more footwear exposure, are less exposed to China suppliers, and broadly have higher starting profitability.
Beyond Retail
Here’s how Morgan Stanley Research sees the impact of tariffs on other consumer-facing sectors:
Auto Dealers
While tariff concerns have boosted vehicle sales, prices and profits so far, auto dealers are likely to be under pressure in the second half of the year due to demand exhaustion, higher prices and weaker consumer sentiment.
“In our view, the sector’s ability to cut costs and allocate capital strategically will help mitigate volume and profit headwinds in a weaker consumer-tariff scenario,” says Morgan Stanley U.S. Auto Dealers Equity Analyst Daniela Haigian. “We believe auto dealers are well positioned to operate through both tariff and no-tariff scenarios.”
Restaurants
Restaurants don't have much direct tariff risk, giving them an advantage within the broader consumer spectrum. Their few vulnerabilities reside in packaging and “smallware” such as cooking tools.
Still, Morgan Stanley Research reduced its 2025 growth forecast for the sector to 4.1% from 4.8% previously, because of the expectation of slower U.S. economic expansion this year.
“The main concern is demand, not costs, for most companies in the sector,” says Morgan Stanley U.S. Restaurants and Food Distributors Equity Analyst Brian Harbour.
Travel
According to recent U.S. data, sales of airline tickets and hotel bookings are slowing while cruise activity is falling. A combination of general concerns on tariffs, consumer sentiment, economic outlook, along with worries on how Europeans will welcome customers from the U.S., could be behind the weakness in the travel industry. However, continued monitoring of daily TSA travel data, consumer and corporate surveys, and other datapoints shows the industry does not yet have cause for alarm.
