The economy is about to slow down. That’s the time for retail stocks, says Goldman Sachs.

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What exactly they’ll spend their money on is the subject of our call of the day, with Goldman Sachs telling clients to choose retailers over autos. In short, under the consumer discretionary umbrella — goods and services we don’t exactly need when the going gets tough — they believe retailers will fare better as the economy moves forward.

A team led by chief U.S. equity strategist David Kostin said they expect the equal-weight consumer discretionary sector will underperform its S&P 500
SPX
counterpart by 7 percentage points over the next year. Its methodology strips out the mega influence of Amazon
AMZN,
-1.70%
and Tesla
TSLA,
-1.47%,
up 61% and 113% year to date, respectively.

One big reason to own retail stocks is that they have ground to make up. On an equal-weighted basis, consumer services has been the best performing sector year to date, with a gain of 33%, followed by automobile & components at 30%, with consumer durables & apparel up 8% and consumer discretionary distribution & retail just 2% higher.

“Retail has historically outperformed autos during all phases of the business cycle, except when the economy is reaching peak expansion,” says Kostin and the team.

Earnings revisions for retail have also pushed higher, but autos have stagnated. Goldman notes that Home Depot
HD,
-1.19%,
Ross Stores
ROST,
-1.16%
and TJX
TJX,
-0.37%
have beat consensus estimates since the start of second-quarter earnings season. And “disciplined inventory management” has likely helped Gap
GPS,
-1.41%,
Nordstrom
JWN,
-0.69%,
Kohl’s
KSS,
-2.29%
and Macy’s
M,
-1.56%
all beat second-quarter estimates on margin delivery.

Kostin and Co. also note that retail has often outperformed autos during periods of low retail inventory to sales ratios — which is in the bottom quartile relative to the past 10 years, versus an elevated one for autos.

Autos are also facing a unique headwind as a group of companies that will have to rely on strategic pricing to boost demand, given China’s growing might among electric vehicle players. Then of course, there is the unique headwind of ongoing United Auto Worker strikes.

The Goldman team expects that the resumption of student-loan payments will create a significant drag among middle-income consumers, “which should create a larger headwind for autos than retails.”

“On average, autos sales growth is highly exposed to discretionary spending by the third income quintile while retail sales growth is less exposed,” they say.

Geography is also a plus for retail, which is more domestic facing than autos. Citing recent company filings, 80% of retail revenues and 66% of auto revenues are U.S. derived, meaning the former is more insulated should global economic pressures, say from Europe and China, crop up.

Also read: JPMorgan gives Dollar General its worst rating after company presentation

The markets

Stock futures
ES00,
-0.73%

NQ00,
-0.99%
are lower, with Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
continuing to climb, while oil
CL.1,
-0.60%
keeps backing off highs seen earlier this week. Asian stocks sold off , with 1% plus losses across the board
JP:NIK

HK:HSI

AU:XJO.
The dollar
DXY
is firmer, with the pound
GBPUSD,
-0.75%
drifting lower as investors await a Bank of England policy meeting.

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The buzz

FedEx shares
FDX,
+0.21%
are up 5% after the package deliverer lifted its full-year profit outlook.

Klaviyo
KVYO,
+9.20%
is down 3% a day after the digital-marketing platform closed up 9.2% in its trading debut. And shares of online grocery-delivery service Instacart shares
CART,
-10.68%
continue to slip, a day dropping to their IPO price amid investor buyer’s remorse.

Shares of Kezar Life Sciences
KZR,
-4.20%
are up 10% after the biotech announced a deal with biopharmaceutical Everest Medicines to develop and commercialize a lupus nephritis drug in Asia.

Weekly jobless claims, a Philly Fed manufacturing survey and the U.S. current-account deficit are all due at 8:30 a.m., followed by U.S. leading indicators and existing home sales at 10 a.m.

Hollywood writers and studios are reportedly near a deal to end a monthslong strike that has ground TV and movie production to a halt.

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The chart

The S&P 500 is ready to revisit the so-called “Mendoza Line,” according to this chart by John Roque at @daChartLife:

The Chart Report’s Patrick Dunuwila who flagged it, notes that bears gained control of the near-term trend on Wednesday, after battling with the bulls for weeks, as the S&P 500 “violated the lower bounds” of that pattern.

“John points out that today’s action opens the door for a -4.5% drop to support at 4,200. It would make a lot of sense to revisit 4,200, or “The Mendoza Line,” as John calls it. This level coincides with the 200-day moving average, and it’s come into play numerous times over the past two years,” said Dunuwila.

The Mendoza Line is named after MLB shortstop Mario Mendoza, who played in the 70s and early 80s, and who fielded well, but struggled to keep his batting average at about .200. That became the line in the sand for hitters drifting into trouble.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

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