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Msg  138855 of 140620  at  9/14/2022 6:24:02 AM  by

MikeyHorse


Hot Inflation Is Hitting Growth Stocks Today. It Will Hit This Group Next.

 
Author: Root, Al

Publication info: Barron's (Online) ; New York (Sep 13, 2022).

It's a tough day for growth stocks after inflation came in hotter than expected. But the growth trade isn't the only thing that will be impacted by the recent inflation readings. Some cyclical stocks , which have been a haven for investors in 2022, might be next to take a hit.

The Nasdaq Composite, home to many high-growth tech names, is off 3.9% in midday trading. The Dow Jones Industrial Average, home to larger, more established companies, is off 2.7%.

That is the reaction investors might have expected after consumer prices in August rose 8.3% year over year. Economists expected 8.1%. What's more, excluding more volatile food and energy prices, prices rose 6.3% year over year—faster than the 5.9% comparable figure for July.

Tuesday's stock market reaction represents the first phase of the inflation reaction, says Brian Rauscher , Fundstrat's head of global portfolio strategy. There will be a second phase related to a slowing economy.

"Today isn't about earnings," says Rauscher. "It's about multiples."

Today, two of the weakest stocks in the S&P 500 are Nvidia (NVDA) and Amazon.com (AMZN). Those stocks are down more than 7% and 5%, respectively. Those two trade for about 30 times and 38 times estimated 2023 earnings, respectively.

Makes sense. Higher inflation leads to higher interest rates and higher rates tends to depress valuation multiples. High-multiple stocks simply have farther to fall.

On the flip side, the winners in the S&P 500 today are commodity-linked stocks that can benefit from higher inflation such as lithium miner Albemarle (ALB) and agricultural seed and chemical maker Corteva (CTVA). Those stocks are both up more than 2%.

Rauscher warns investors to watch out for weakening cyclical and commodity-linked stocks down the road though.

He doesn't see the current bout of inflation being driven by excess demand that requires miners and industrial firms to dig higher-priced metal and metal ores out of the ground. The current bout of inflation, for him, has been more about supply-chain and labor disruptions adding costs.

Inflation will come down as the Fed slows the economy with higher interest rates. So investors shouldn't be worried that this bout of inflation will have consumers facing higher prices because of skyrocketing values for copper, lithium or even oil. Instead, a slowing economy will mean less demand for metals and energy. Investors should be worried about decelerating earnings growth as rates move higher than expected faster than expected.

Cyclical stocks are the ones that tend to see the biggest swings in earnings as the economy goes from growth to contraction and back to growth again. Industrials, metals and mining as well as energy stocks are generally consider to be cyclical.

Investors just aren't worried about falling earnings for those groups yet. So far in 2022, cyclical sectors have led. Energy companies in the S&P are up about 45% year to date on average. The SPDR Metals & Mining ETF (XME) has gained about 10%.

If Rauscher is right, investors might want to think about locking in so of those cyclical stock profits in coming months, before the next phase of this bout of inflation begins.

Write to Al Root at allen.root@dowjones.com

Hot Inflation Is Hitting Growth Stocks Today. It Will Hit This Group Next.

Credit: Al Root


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