A Surge in Inflation Isn’t a Problem for Everyone
Magnificent Seven stocks are viewed as safe havens when inflationary pressures increase.
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On Thursday, the indexes rebounded sharply from a sell-off triggered by a hotter-than-expected CPI report. The report caused bond yields to rise, pushed back expectations of a Fed interest rate cut, and gave the bears some hope of a deeper correction, but the selling pressure didn’t last long.
The market has consistently trended higher for months, although there are signs of higher inflation and a more hawkish Fed. The bears consistently warn about how holding rates higher for longer will damage the market, but they have been wrong.
The problem is that the market views big-cap technology names like Nvidia NVDA and Microsoft MSFT as safe havens when there is an inflation scare. Money flows into these names like it did on Thursday, and the relative outperformance attracts more inflows.
Big-caps that are largely leveraged to AI typically don’t carry heavy debt. They have giant margins, so they don’t suffer as much from an inflationary supply chain. Inflation is actually helpful in that it allows prices to be increased faster than underlying costs.
Small-caps, on the other hand, tend to carry much more debt and have severe margin pressures as they are unable to raise prices as easily but still face rising costs in the supply chain. Small-caps have chronically underperformed since inflation became an issue several years ago, and they lagged again on Thursday when the big-cap technology names rebounded.
Earnings season is starting now with some bank reports, and it is very likely that the Magnificent Seven names will continue to post strong reports and give positive bias. Inflation is not an issue that is going to hurt them very much when they have the AI boom providing a tailwind.
In theory, inflation should be a negative for equities, but it doesn’t impact the big names that drive the indices. The Magnificent Seven stocks are a safe haven when worries about inflation are building.
We have a mixed start on Friday morning, but reports from JP Morgan Chase JPM, Citigroup C, and Wells Fargo WFC will be hitting, but the key issue will continue to be rotation into safe havens that aren’t concerned about inflation.
At the time of publication, James "Rev Shark" DePorre was long NVDA.
