Evercore ISI: Policy Dividend is coming, these "K-shaped economies" are damaged, US stocks are expected to rebound in 2026.

Julian Emanuel, Senior Managing Director of Evercore ISI's Stocks, Derivatives and Quantitative Strategy team, released a research report stating that the government's focus on "affordability" issues is expected to drive the sectors of the economy and stock market that have been performing weakly to rebound in 2026. He pointed out that politicians and policymakers have reached a consensus to address the imbalance caused by the current "K-shaped economy" - where despite the strength of the S&P 500 index being driven by artificial intelligence, wage growth for low-income groups remains weak. "Affordability is not just one factor, but a decisive factor." According to calculations by Evercore ISI's Washington policy team, the tax cuts in the "Big and Beautiful Act" are expected to release about $300 billion in stimulus in the 2026 fiscal year, equivalent to 1% of the US GDP. The team emphasizes that about 45% of the stimulus funds will come from household tax cuts, mainly targeting middle-class families with annual incomes below $200,000. Emanuel added that although tariffs may offset a significant portion of the stimulus, the government is considering a $2000 "tariff rebate" check plan before the November midterm elections. The Federal Reserve's policy adjustments will also provide support for the necessary and discretionary consumer sectors. After a historic nine-month pause, the Federal Reserve resumed its rate-cutting cycle in September. Emanuel predicted that the Federal Reserve will likely cut rates by another 25 basis points on December 10 and will continue to cut rates in 2026. "Once the Federal Reserve starts a rate-cutting cycle, the necessary and discretionary consumer sectors will be the standout leaders in the six and twelve-month dimensions," he further stated. The strategist advised investors to focus on stocks that have been hit hard by the K-shaped economy, specifically targeting consumer companies whose stock prices have fallen since the beginning of the year, with price-to-earnings ratios lower than their five-year average and profit margins below the five-year average. The recommended targets include Mondelez International (MDLZ.US), Procter & Gamble (PG.US), Constellation Brands (STZ.US), Darden Restaurants, Inc. (DRI.US), Lithia Motors, Inc. (LAD.US), PVH Corp (PVH.US), and Energizer Holdings, Inc. (ENR.US). Emanuel concluded, "Tax cuts and 'tariff rebate' checks will boost consumer confidence, support corporate profit margins, and become catalysts for these stocks to outperform the market." Here are other stocks listed by Evercore ISI as "dragged down by the K-shaped economy," showing significant discounts in their 12-month forward price-to-earnings ratios compared to their five-year average: Target Corporation (TGT.US) - 26% discount, General Mills, Inc. (GIS.US) - 20% discount, Lululemon (LULU.US) - 54% discount, Hormel Foods Corporation (HRL.US) - 26% discount, LKQ Corp (LKQ.US) - 25% discount, CarMax, Inc. (KMX.US) - 32% discount, e.l.f. Beauty (ELF.US) - 42% discount, Bath & Body Works (BBWI.US) - 42% discount, Simply Good Foods (SMPL.US) - 53% discount, J & J Snack Foods Corp. (JJSF.US) - 36% discount, Wendy's (WEN.US) - 53% discount, Energizer Holdings, Inc. - 47% discount.