For bond investors, inflation is bad news because the value of future returns will decline. As for stock traders, the impact can be "softer", as some companies are still able to profit from the general price increase.

Although there will be more losses in the stock market if price pressure increases, previous events suggest that this scenario still creates opportunities. A study from Ned Davis Research shows that energy stocks have consistently rallied during periods of high inflation over the past five decades.

Meanwhile, Goldman Sachs recommends companies that are now better prepared to profit from sales such as automaker Ford Motor and media company Discovery. As for Societe Generale, the imbalance between supply and demand shows that mining stocks, fertilizer manufacturers will be effective hedges if price pressure increases.

No matter how optimistic Fed Chairman Jerome Powell is on the subject, inflation will sooner or later become an issue for the stock market. In the last few weeks alone, investors have seen worrisome signs of everything from a global chip shortage in the computer manufacturing sector, to record increases in product prices. made in the US.

With the positive economic outlook, the number of Covid-19 infections falling, and a larger fiscal stimulus package underway, concerns about inflation are "pervasive". According to Tobias Levkovich, chief equity strategist at Citigroup, this means that pricing power becomes a "generator", given the wide variation in how companies respond to inflation. broadcast.

"Leading indicators suggest inflation concerns may be looming. Companies with price flexibility will be the winners," he said.

According to Ned Davis, energy stocks perform best during times of rising consumer prices. The company's research shows that, in seven of the nine times when inflation has increased since 1972, the industry has outperformed the S&P 500 by about 14 percentage points.

When ranked by investment style, Ned Davis notes, stocks with cyclical value — businesses whose revenues are susceptible to economic fluctuations and often have relatively low valuations — tend to tend to perform better when inflation is high.

This year, crude oil prices have risen sharply as confidence in the recovery of the global economy has been strengthened. Such bets are already somewhat evident in the stock market, with shares of energy producers including Exxon Mobil Corp. and Marathon Oil Corp. prices all increased. The industry has led the S&P 500's gain in 2021, up five times that of the benchmark index.

According to Bloomberg, the polarizing effect of inflation on the market is not easy to understand. On the surface, however, investors are preparing to respond by considering companies with high operating leverage or the ability to reap profits from sales.

Stocks of companies with high operating leverage outperformed the low leverage group for 4 consecutive months.
While both selling and input costs tend to increase as inflation rises, companies with strong financial leverage are likely to provide more stability to stocks. The reason is, the effect of increasing revenue will outweigh the cost of production.

Since early February, a basket of stocks with the highest operating leverage has "beaten" the group of least-leveraged stocks by 1.7 percentage points, according to Goldman Sachs and Bloomberg data. The indicator is recording a fourth straight month of gains – the longest streak since 2013.

According to Goldman Sachs strategists, higher input costs, such as commodities, have less of a negative effect on the profits of S&P 500 companies in part because certain industries benefit. when raw material prices increase, while other industries bear the risk.

Labor costs, on the other hand, are a concern, with the strategists pointing out that a 100 basis point increase in wage growth estimates could cost them 1% of profits. Accordingly, they advise investors to prioritize companies with lower labor costs in revenue, such as Under Armor and Biogen.

David Krostin of Goldman Sachs said: "Many investors believe that increased spending will lead to higher inflation and interest rates. In the past, inflation has boosted nominal S&P 500 earnings, but has caused it to fall. pressure on profit margins as companies struggle to raise prices to keep up with input costs."

Societe Generale's strategists have tracked a basket of stocks based on their sensitivity to indicators such as copper price movements and food prices. Stocks in the basic materials, technology, and energy sectors currently account for two-thirds of this list.

This group of stocks has proven its worth with momentum in line with inflation expectations in recent months. But there is a downside, which is underperforming during deflation, the strategists note. They have come up with a suitable investment strategy option in this moment called "call option replication" - to limit the risk of falling prices while maximizing the uptrend.