Stocks affected by the ‘K-shaped economy' expected to rebound – Evercore ISI

Political focus on “affordability” could lift the struggling segments of the economy and the stock market into 2026, according to Julian Emanuel, senior managing director of the Equity, Derivatives & Quantitative Strategy Team at Evercore ISI.

Both politicians and policymakers are united in their commitment to addressing the “K-shaped” economy where lower-income groups continue to face anemic wage growth despite the AI-driven boom in the S&P 500 (SP500), he said. “Affordability isn’t everything, it’s the only thing.”

The One Big Beautiful Bill Act tax cuts are expected to provide approximately $300B, or about 1% of GDP, in fiscal year 2026, according to Evercore ISI’s DC Policy team. They noted that roughly 45% of this stimulus will come from household tax cuts primarily targeted at middle-income households earning under $200,000. Emanuel also highlighted that while tariffs may offset a significant portion of this stimulus, the administration is floating the idea of $2,000 “Tariff Rebate” checks ahead of the November midterms.

Federal Reserve policy is also aligning to support consumer sectors (XLY), (XLP), as the central bank restarted its rate-cutting cycle in September following a historic nine-month pause. Another 25-basis-point cut is likely on Dec. 10, with additional cuts expected in 2026, Emanuel said.

“Both consumer staples (XLP) and consumer discretionary (XLY) sectors are standout outperformers on a 6- and 12-month basis once the Fed cutting cycle starts, or in this case, restarts,” he added.

The strategist recommends investors consider buying stocks “crushed by the K” – specifically consumer companies that are down year-to-date, trading below their 5-year average P/E ratios, and with net margins below their 5-year averages.

Among these recommendations are Mondelez (MDLZ), Colgate-Palmolive (CL), Constellation Brands (STZ), Darden Restaurants (DRI), Lithia Motors (LAD), PVH Corp (PVH), and Energizer (ENR).

“Improving consumer confidence from tax cuts and ‘tariff rebate’ checks could bolster confidence, support margins and catalyze outperformance,” Emanuel concluded.

Here are some other of the “crushed by the K” list of stocks, according to Evercore ISI, with the highest 12-month forward PE compared to the past five years in average:

• Target (TGT) – 12M fwd PE vs. 5-Yr Avg.: -26%
• General Mills (GM) – 12M fwd PE vs. 5-Yr Avg.: -20%
• Lululemon Athletica (LULU) – 12M fwd PE vs. 5-Yr Avg.: -54%
• Hormel Foods (HRL) – 12M fwd PE vs. 5-Yr Avg.: -26%
• LKQ Corp. (LKQ) – 12M fwd PE vs. 5-Yr Avg.: -25%
• Carmax (KMX) – 12M fwd PE vs. 5-Yr Avg.: -32%
• elf Beaty (ELF) – 12M fwd PE vs. 5-Yr Avg.: -42%
• Bath & Body Works (BBWI) – 12M fwd PE vs. 5-Yr Avg.: -42%
• Simply Good Foods/The Food Products (SMPL) – 12M fwd PE vs. 5-Yr Avg.: -53%
• J & J Snack Foods (JJSF) – 12M fwd PE vs. 5-Yr Avg.: -36%
• Wendy’s Co. (WEN) – 12M fwd PE vs. 5-Yr Avg.: -53%
• Energizer Holdings (ENR) – 12M fwd PE vs. 5-Yr Avg.: -47%