The retail industry is about to get a big boost from Republican tax cuts, setting the sector up "exceptionally well" in the new year, according to one of Wall Street's biggest banks.
"A potentially overlooked story that's developing could be the amount of stimulus about to be released upon consumers by all U.S. corporate actions regarding employee pay/bonuses from the tax reform," analyst Matthew McClintock wrote in a note to clients.
The analyst compared the current GOP measure to one passed under President George W. Bush in 2001, when sales growth at retailers surged in the months following tax relief thanks to an influx of cash into the economy.
"We believe that these 'windfalls,' whether through unexpected pay raises or one-time bonuses will flow largely through discretionary spend, particularly big ticket items," he said.
Shares of Target and Lowe's closed up 1.1 percent and 2.1 percent respectively following the call.
McClintock upgraded Lowe's to overweight and Target to equal weight largely based on his belief that more companies will follow others in offering employees higher pay or bonuses in light adjustments to a low corporate tax rate. A key component of the Republican plan cuts the corporate tax rate to 21 percent in an effort to make the U.S. more competitive.
"We expect retailers are now increasingly likely to follow Target's lead in going to a $15 minimum wage by 2020, especially given the tight labor market combined with accelerating sales," McClintock wrote.
He noted that the two retailers deserved rating upgrades not only because of the expected stimulus, but also because they appear able to navigate around competitors in e-commerce.
"The Amazon competitive threat becomes slightly less worrisome as many traditional retailers will likely have more room to invest in price," he said.
McClintock's $120 price target on Lowe's represents 29 percent upside from Thursday's close, while his $70 target on Target is 6 percent higher.