By Sabrina Escobar

Retail stocks surged Monday after the U.S. and China agreed to a 90-day tariff cease-fire, lifting a de facto trade embargo between the countries that put retailers in a tight spot as they planned for the holiday season.

The Trump administration agreed to cut its 145% levy on Chinese imports to 30%, while Beijing's 125% tariff will be cut to 10% as trade negotiations continue over the next three months.

While the news sparked a widespread rally for stocks -- the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all rose more than 2% in early trading -- many retail stocks were outstripping those gains.

Wayfair led the way with a 20% gain, while e.l.f. Beauty soared 19%. Five Below and Williams-Sonoma had gains in the low double digits, while Nike, Abercrombie & Fitch, Macy's, Target, Gap, Hasbro, Best Buy, and Mattel rose by between 5% and 10%. Walmart, which had been seen as a potential tariff winner because its size and financial strength created the potential for it to gain market share, gained 1%.

"While the drop in tariffs between the U.S. and China is a temporary pause and the tariffs today remain higher for both countries than they were a few months ago, the 90-day reprieve comes at a vital time in the supply chain cycle as retailers and suppliers work to ensure that shelves are stocked for the all important back-to-school and holiday shopping seasons," said Carol Schleif, chief market strategist at BMO Private Wealth.

Although many retailers have been shifting their supply chains away from China ever since President Donald Trump imposed his first wave of tariffs back in 2018, the industry is still heavily reliant on Chinese imports.

For instance, China accounted for roughly a quarter of total furniture imports in 2024, according to data from the U.S. International Trade Commission. A little under 80% of all toys sold in the U.S. were made in China, per the Toy Association, a trade group. Around 30% of imported clothing and accessories are still made in China, even though countries such as Vietnam, Indonesia, Cambodia, and Bangladesh are becoming increasingly dominant in the apparel sphere.

China, the world's second-largest economy, also remains a powerhouse in manufacturing consumer electronics. Best Buy executives have estimated that their vendors import about 55% of products from China.

All in all, the news is a "major positive" for retailers, helping reduce the risk of empty shelves and a recession that could hit consumer spending, wrote Bradley Thomas, an analyst at KeyBanc Capital Markets. That said, it doesn't provide an "all clear" for the companies in terms of costs, revenue, and profit.

"Most retailers still have some margin risk from the 30% China tariff (plus 10% rest of world tariff) that generally hasn't been factored into company guidance," he wrote. Plus, it is likely retailers will use the 90-day pause to stock up on inventory for back-to-school and holiday shopping, creating the potential for a flood of buying that could elevate the cost of shipping in the short term.

For that reason, Thomas continues to recommend investors bet on companies with less exposure to tariff risk, such as Walmart, Ollie's Bargain Outlet, and Casey's General Stores.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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May 12, 2025 11:00 ET (15:00 GMT)

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