Ned Davis Research Advises Value Stocks, Energy, Materials in Rising Inflation

Ned Davis Research stated in a client note released Thursday that value stocks have historically outperformed during periods of rising inflation. 8% yearly pace in April. The research firm said the disinflation environment that supported markets since October 2022 has shifted.

Rob Anderson, a strategist at the firm, and Thanh Nguyen, an analyst, said the data indicate an inflationary headwind has replaced the prior backdrop.

Research identified energy, consumer staples, health care, and materials as sectors that posted the strongest relative gains when inflation rose. 3% gain, and health care a 4% gain, based on the firm's analysis of data since 1972. The firm also noted that real estate, energy, materials, and industrials have shown the strongest earnings growth during inflationary periods.

Real estate posted average earnings-per-share growth of 34%, while energy and materials each averaged about 30% growth.

Financial stocks posted an average relative loss of 11% during periods of rising inflation, the weakest performance among sectors, according to the analysis. Higher prices can keep interest rates elevated longer, increasing funding costs and leading to portfolio losses.

Ned Davis Research added that the Federal Reserve's last rate cut occurred in December. The firm said a six-month pause in policy changes, which would be reached in June, has historically been followed by a market pullback within four months.