Stock Analysis & Ideas

Inflation Cools Down: Which Stocks Will Benefit, and Which Won’t

Story Highlights

Investors are betting that “peak inflation” has come and gone as November’s CPI print came in lighter than expected. This means some stocks could head much higher in 2023, while others could get left behind.

Even prior to the November Consumer Price Index release, the major stock market indices were up in anticipation of a cool-down in inflation. After November’s annualized CPI came in at 7.1% versus the 7.3% that economists had expected, large-cap stocks roared ahead as investors hoped inflation had finally peaked.

Additionally, core CPI increased 0.2% month-over-month and 6% year-over-year, compared to economists’ estimates of 0.3% and 6.1%, respectively. Investors shouldn’t necessarily assume that inflation has “peaked” and will continue to move lower in the coming months. However, if the CPI downtrend does persist into 2023, that’s good news for some stocks and not-so-good news for others.

Stocks to Consider Now

Cyclical stocks, which do well during a growing economy but struggle when the economy contracts, had a tough time in 2022. Yet, 2023 could be a banner year for these so-called growth stocks, especially technology stocks which got hammered this year. Notable names in this category could include Meta Platforms (NASDAQ: META), Intel (NASDAQ: INTC), and PayPal (NASDAQ: PYPL).

In addition, commodities are likely to get a boost if inflation eases next year since they’re typically measured against the U.S. dollar. Therefore, it could make sense to wager on oil drillers like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) or on a gold miner such as Newmont (NYSE: NEM).

Stocks That Could Underperform

Few stocks will actually lose value if inflation has actually peaked; as they say, a rising tide lifts all boats. However, this might be a good time to allocate away from defensive names that performed well in 2022 but might lag growth stocks next year.

Thus, while it’s rarely a “bad” idea to hold shares of ultra-defensive Coca-Cola (NYSE: KO), Walmart (NYSE: WMT), and Merck (NYSE: MRK), don’t expect these safety stocks to outperform if inflation continues to retreat. There’s no need to hide out in an all-weather name like General Mills (NYSE: GIS) – a perfectly good company and stock, by all means – when the market’s weather report calls for mild and sunny skies as inflation finally backs down.

Disclosure

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