Australian retail shares have had a pretty rough year, and today isn't doing much to change that.
The S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) is down 0.4% to 3,477 points in late morning trade.
This means the sector has now fallen almost 13% in 2026 and 23% over the past year.
It just shows how quickly sentiment towards retail stocks has changed this year.
And Morgan Stanley still sees plenty to worry about from here.
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Why is Morgan Stanley still cautious?
According to The Australian, Morgan Stanley has taken another look at the retail sector following the latest reporting season.
And the broker is still cautious about FY27, even after the falls we've already seen across retail stocks.
Analyst Melinda Baxter and her colleagues said "discretionary stocks have de-rated, but earnings risks remain".
Consumer spending held up better than Morgan Stanley expected through FY26, but the broker still sees some risks ahead for households.
There are a few reasons for that.
The RBA has lifted the cash rate 3 times this year, taking it to 4.35%.
Many mortgage holders are now paying more on their loans than they were at the start of 2026.
Consumer confidence has taken another hit as well.
The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.2% to 84.4 in September.
Westpac said petrol prices had moved back above $2 a litre, while concerns about another RBA rate hike were weighing on households.
The housing market has also started going backwards.
National home prices fell 0.2% in August, marking a fifth consecutive monthly decline from their March peak.
Morgan Stanley thinks all of this could make shoppers a little more careful about where they spend their money.
The broker expects consumers to focus more on value, replacement purchases and promotions as household budgets get tighter.
Which ASX shares does Morgan Stanley prefer?
Morgan Stanley isn't negative on every retailer, but it has still cut price targets across its discretionary retail coverage.
Wesfarmers Ltd (ASX: WES) was one of the few stocks to get some good news.
The Bunnings and Kmart owner was upgraded from underweight to equal-weight, with Morgan Stanley pointing to its more stable margins.
Wesfarmers shares are up 0.39% to $73.15 today.
Harvey Norman Holdings Ltd (ASX: HVN) went the other way.
Morgan Stanley downgraded the stock from equal-weight to underweight, pointing to its franchise model and exposure to the housing market.
Harvey Norman shares are down 0.96% to $4.13 in Friday trade.
The broker also remains cautious on JB Hi-Fi Ltd (ASX: JBH) and Super Retail Group Ltd (ASX: SUL).
Morgan Stanley has kept both stocks at underweight, with the shares trading at $65.77 and $12.37, respectively.
