H&M's latest numbers landed with a thump: growth in sales was tepid, and profitability would have been slimmer without tariff refunds. The Swedish fashion chain, already one of the laggards inside Europe's retail subindex, slid further on Thursday. The weakness is not isolated. Earlier this month, Zara parent Inditex posted results that disappointed, and Next trimmed its UK sales guidance.
Retail has badly trailed the wider market this year, with the Stoxx 600 Retail Index down 5.2% against a 7.5% rise in the overall Stoxx 600. Positioning reflects that caution. In a recent Bank of America poll, a net 50% of fund managers reported being underweight in European retail - the lowest reading since July 2014 - and the segment remains among the most underowned compared with its long-term average.
That's a sharp reversal from three years back, when a combination of easing inflation and released pent-up demand produced a 34% surge. Now, other consumer-linked indexes including autos, luxury and personal care are also behind. Sentiment is softening too: euro-area consumer confidence worsened in September, the first setback in five months. On earnings, analysts had penciled in a 13% rebound for consumer discretionary profits this year after a 20% decline in 2025, according to Bloomberg Intelligence, but UBS strategists find more estimates are being cut than raised.
The technical backdrop offers little help. The Stoxx 600 Retail Index is trading under its 200-day moving average, a threshold that has frequently served as support, while its relative strength index remains above 30. Translation: it is not yet in typical oversold territory, and the slide can continue until the outlook for oil and inflation clears.
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Higher energy costs and tighter policy are pinching shoppers. Brent crude above $100 is lifting diesel and natural gas prices, reviving warnings about a winter energy hit reminiscent of 2022. Central banks' inflation fight also means steeper rates on mortgages, car loans and credit cards. The prolonged Middle East conflict adds to the uncertainty, and much depends on the Iran war ending and on reopening the Strait of Hormuz to ease the strain on energy prices.
"It's all about oil," said Barclays Plc strategist Emmanuel Cau. "If oil goes down because there's a deal or de-escalation, there's a case for some of the stocks to bounce because positioning is very, very bearish." Not everyone is sticking around to find out. "I have zero allocation to European consumer-related sectors," said Roland Kaloyan, a strategist at Societe Generale SA. "You have higher gasoline prices, higher rates and a lot of uncertainty on geopolitics. That's quite stressful for people, and it's very difficult to say this is a cocktail that's going to be positive."
Retail's heft in the main European benchmark is limited, which helps explain why the broader market has held up better. Based on Bloomberg data, consumer staples plus discretionary make up under 14% of the Stoxx 600, whereas financials, industrials and healthcare total 57%. But if weaker demand starts to weigh on growth, the drag can broaden beyond shop floors.
For everyday investors, the hinge is energy and inflation. If fuel and utility bills keep rising, cautious positioning and fading earnings conviction set the stage for more bumps. If crude cools on de-escalation and shipping routes reopen, the sector could see a relief bounce, just as Emmanuel Cau suggested.
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