With fundamentals for the retail sector and macro economic data weakening over the past few months, UBS is lowering its earnings forecasts and price targets for many of retailers consistent with a “2008 recession scenario.”

But it is not all doom and gloom. In fact UBS said at the same time it is “turning more upbeat towards prospects for retail stocks.”

What? Well here is the reasoning UBS listed in its research note:

1. Recession Priced Into Shares. Since early Sept. our UBS Specialty Retail Index is down nearly 30% vs. a decline of about 5% in the S&P 500. At current levels retail stocks trade at valuations consistent with troughs reached in prior economic downturns. We believe that retail stocks now discount for a potential recession in the U.S. and are poised to rebound as the market mindset shifts from “will the economy slip
into recession?” to “who will perform in a recovery?”.

2. An Early Cycle Group. Our research suggests that retail stocks typically begin to rise and outperform the market early in economic cycles and as macro data points such as unemployment and consumerconfidence deteriorate.

3. Retail Stocks Rally Before Company Fundamentals Turn. In prior economic slowdowns the bottom and subsequent rebound in retail stocks has not been marked by an upswing in company fundamentals but rather outside catalysts such as a peak in oil/commodity prices, the introduction of fiscal stimulus packages, and/or more aggressive Fed easing. A rapidly declining macro environment, a potentially “behind the curve” Fed, and an upcoming Presidential election, in our view, help to increase chances for a potential positive catalyst for retail stocks near-term.

So with that, UBS upgraded its ratings to “buy” from “neutral” on Bed Bath & Beyond and Staples. It also reiterated its ”buy” recommendations on the following stocks: Abercrombie & Fitch, Best Buy, Coach, Dick’s Sporting Goods,  Nordstrom, Life Time Fitness, Lowe’s, Macy’s, Nike, Under Armour, Urban Outfitters, and VF Corp.