Bank of America just dropped one of the sharpest reads on the U.S. economy, and it comes down to just four words: “classic stagflationary market environment.”
According to Seeking Alpha, that’s how Savita Subramanian describes the current market, where consumer activity is sluggish even as inflation-sensitive sectors rally.
Put simply, the market signals are starting to clash.
Investors usually position themselves for a specific problem at a time. However, when the market faces slowing growth and rising inflation simultaneously, it often behaves in contradictory ways.
The renewed inflation fears aren’t hard to see.
Since the Iran conflict started on Feb. 28, Brent crude has surged by more than 60% to the high-$60s to low-$70s a barrel to above $100, even with a brief ceasefire dip.
Moreover, U.S. regular gasoline followed suit, rising from under $3 a gallon in late February to a little over $4 this month.
Naturally, the result is a market that feels remarkably noisy, with investors wrestling with a backdrop that offers little clarity.
Not only does it complicate stock picking, but it also points to an economy that’s entering a far trickier phase than what the standard bullish or bearish narratives suggest.
CHARLY TRIBALLEAU / Contributor
S&P 500 returns over the past 5 years
- 2025: year-end close 6,845.50; annual gain 16.39%.
- 2024: year-end close 5,881.63; annual gain 23.31%.
- 2023: year-end close 4,769.83; annual gain 24.23%.
- 2022: year-end close 3,839.50; annual loss 19.44%.
- 2021: year-end close 4,766.18; annual gain 26.89%.
Source: S&P Dow Jones Indices, Federal Reserve Economic Data (FRED).
Breaking down stagflation in simple terms
Stagflation sounds complex, but it’s a pretty simple idea.
It happens when the economy slows, yet the prices of goods and services continue to rise.
Typically, the two don’t happen together.
That’s like when your paycheck isn’t growing, but your groceries, gas, and other items continue getting more expensive.
When an economy is healthy, growth and inflation move together.
When economic growth is robust, prices jump because demand remains high. However, when growth stalls, inflation typically cools off. Stagflation tends to break that pattern, which is why it’s so painful.
Moreover, there are other types of inflation.
Demand-driven inflation occurs when excessive spending pushes prices higher.
Cost-driven inflation results from growing input costs, such as energy or wages. There’s also “mild” inflation, where prices rise sluggishly and predictably.
Stagflation combines the worst of both worlds.
U.S. stagflation periods over 100 years
- 1973 to 1975: Recognized as the first classic U.S. stagflation episode. Fed history shows that the 70’s high inflation and unemployment, along with the 1973-74 oil shock, sent crude oil prices from $2.90 a barrel to $11.65 by January 1974.
- 1978 to 1982: The second wave. Fed history dates the broader Great Inflation from 1965 to 1982; by summer 1980, inflation hovered near 14.5%, and unemployment was above 7.5%.
- Since 1982: No later U.S. period has been classified by the Fed and economists as a full stagflation era.
What is driving BofA’s stagflation warning
Subramanian pointed to a unique economic scenario that’s brewing, not a typical late-cycle market.
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That’s perhaps why the recent action in the S&P 500 matters.
Though the index has effectively round-tripped its year-to-date gains, beneath the surface, leadership is shifting in ways that don’t exactly fit a specific playbook.
Instead, investors are crowding into ‘safe havens’, where Subramanian says the market is witnessing a “monstrous rally” in inflation beneficiaries such as industrials and energy.
However, healthcare and consumer staples have been laggards despite a potentially recessionary backdrop.
Three major forces are shaping that view:
- Inflation-linked leadership: Energy attracted investors that kicked off the year significantly underweight, while industrials are trading at the “highest multiple we’ve seen in decades.”
- Confusing defensive signals: Healthcare and staples aren’t acting like the typical shelters we’ve been used to over the years, creating “a lot of crosscurrents that are telling you different things.”
- Selective caution elsewhere: Financials are feeling the heat from the geopolitical conflict and what Subramanian called a “mini credit cycle,” while software, she argues, looks “incredibly inexpensive”.
In fact, I recently covered how Goldman Sachs is sounding the alarm on tech stocks, a sector that’s currently in the weakest relative-return stretches in 50 years.
Energy and industrials outpace broader ETF performance
- Over the past 1 month, theState Street Energy Select Sector SPDR ETFreturned 3.29% versus the all-ETF median of 0.81%, while the State Street Industrial Select Sector SPDR ETF returned 0.58% versus the same 0.81% median.
- Over the past 6 months, the State Street Energy Select Sector SPDR ETF returned 32.47% versus the all-ETF median of 2.47%, while the State Street Industrial Select Sector SPDR ETF returned 10.23% versus the same 2.47% median.
- Over the past 1 year, the State Street Energy Select Sector SPDR ETF returned 56.76% versus the all-ETF median of 28.62%, while the State Street Industrial Select Sector SPDR ETF returned 48.37% versus the same 28.62% median.
- Over the past 3 years, the State Street Energy Select Sector SPDR ETF returned 50.64% versus the all-ETF median of 45.38%, while the State Street Industrial Select Sector SPDR ETF returned 82.30% versus the same 45.38% median.
- Over the past 5 years, the State Street Energy Select Sector SPDR ETF returned 187.95% versus the all-ETF median of 39.04%, while the State Street Industrial Select Sector SPDR ETF returned 84.79% versus the same 39.04% median.
Source: Seeking Alpha.
Investor takeaway
For stock market investors, Subramanian’s message is clear in that it’s probably wise to avoid relying on the old recession playbook.
That means, given stagflation conditions, hiding in traditional defensives might not work as it did in the past.
So instead, it would be wise for investors to focus more on balance-sheet strength, pricing power, and sectors that are still benefiting from inflation-linked demand, such as energy and industrials.
At the same time, it’s best to stay selective in beaten-down growth areas such as software, where cheap valuations alone might not be enough without clearer earnings support.
Financials also deserve another look, especially at larger institutions that appear stronger than investors currently give them credit for.
Related: Morgan Stanley delivers blunt message to Tesla stock investors