Retail is off to a strong start this holiday season, but 2019 may not look so jolly.

Where we were: Retail rallied for much of this year, and a strong Black Friday showing helped to alleviate some fears.

Where we’re headed: It’s time to get selective among retail stocks as the backdrop becomes less accommodating, says Guggenheim.

Before Thanksgiving, investors were worried that retailers wouldn’t be able to live up to expectations after a robust 2017 holiday shopping season. A strong Black Friday/Cyber Monday showing provided some relief, and then the sector got another boost from the trade truce, which at least removes the specter of a new round of tariffs for Jan. 1.

While those factors may have put some skeptics at ease, Guggenheim’s John Heinbockel isn’t convinced. He argues that while retailers may be in a sweet spot now, the operating environment is basically as good as it can get, meaning that things are likely to get more challenging over the next year as demand drifts back toward more normal levels and cost pressures remain. That means it will be difficult for companies to keep improving margins and beating expectations for their earnings.

It may seem odd to worry about retail at a time when consumer confidence is hovering around a nearly two-decade high, but Heinbockel writes that the robust readings from the last six months are simply too good to last. “This spending growth looks unsustainable,” he says.

Not surprisingly consumer discretionary stocks have seen the biggest boost from consumer confidence. After all, it’s much more exciting to buy a new gadget or pair of shoes with the extra money in your pocket than it is to stock up on soap.

Total discretionary spending has risen noticeably in the past two years, driven in large part by furniture, home furnishings, and information processing equipment. Yet that means these retailers could have more to lose. “In a moderating growth environment, discretionary would slow the most,” Heinbockel says.

Then there’s the fact that e-commerce continues to grow relentlessly. While it’s no longer solely the domain of big players like (ticker: AMZN), traditional retailers that have a good online presence still often find that those sales come with slimmer margins, he writes. Freight costs are going up, as are wages, and while tariff relief is good, it’s only temporary.

That’s not to say that Heinbockel suggests throwing in the towel, however. He writes that investors should stick with retailers that are “value-driven share gainers, in both discretionary and consumables channels, who should be able to deliver above-average, profitable growth in this environment.” Restoration Hardware parent RH (RH) and Performance Food Group (PFGC) are his favorite ideas, although he also likes At Home Group (HOME), Ulta Beauty (ULTA), Floor Décor (FND), Dollar Tree (DLTR), Tractor Supply Co. (TSCO), and U.S. Food Holdings (USFD).

Heinbockel isn’t alone in his concern that the Goldilocks environment for retail can’t last forever. The stocks may be able to resume their rally through the end of 2018 if the holiday shopping season remains strong, but in the new year, tariffs will likely regain prominence in investors’ minds. Aside from that, the next catalyst for the stocks will likely be fourth-quarter reports, when we will get a better look at whether organic demand or deep discounting drove sales, not to mention how margins did in an environment where free and fast shipping is becoming the norm.

The SPDR S&P Retail ETF (XRT) was up 1% to $46.80 this afternoon.

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