Bullish indicating open at $55-$60, IPO prices at $37
Investing.com - The U.S. economy is likely to see a period of stronger employment but persistent underlying inflation in the coming months, according to analysts at Wolfe Research.
The strategists led by Chris Senyek predicted in a note that, should this come to pass, the Federal Reserve would opt to leave interest rates unchanged at its current range of 4.25% to 4.5%.
In such a scenario, they recommended that investors take positions in technology and communications services stocks -- many of which have been bolstered by enthusiasm around plans to spend heavily on artificial intelligence -- as well as defensive sectors like staples and utilities.
So-called "defensive" stocks tend to maintain steady returns even during times of economic downturns or market volatility.
"Our sense is shocks in hotter-than-expected inflation data likely [lead] to short episodic periods of risk-off, while thematically the AI spending narrative continues to come in strong, favoring those most levered to the trade," the analysts wrote.
The Wolfe analysts also laid out three other possible paths ahead for the world’s largest economy.
One involves a period of weak job growth and accelerating price gains, dubbed "stagflation." This is "one of the biggest" risks to markets in the second half of 2025, particularly if a potential tariff-driven surge in goods and services inflation persuades the Fed to leave interest rates on hold. Staples, utilities, and growth stocks were recommended in this context.
On the other hand, a more bullish scenario would see the exact opposite: solid employment and decelerating inflation. The Fed would slash borrowing costs in this scenario, possibly sparking outperformance in groups within the benchmark S&P 500 that are more exposed to cyclical changes in the broader economy -- such as discretionary, financials, semiconductors, and transports.
A final scenario would see a wider slowdown, marked by cooling prices and softening employment. The Fed would also reduce rates in this case, and perhaps even more aggressively than in other outcomes, the analysts said. Once again, tech and communication services are preferred in this context, along with utilities, staples and financials.
Amid these scenarios, Wolfe Research provided a list of companies that have missed revenue and earnings expectations in the latest quarterly reporting period, and are also facing negative revisions to their full-year profit estimates. These include Tesla (NASDAQ:TSLA), Kimberly-Clark (NASDAQ:KMB), MetLife (NYSE:MET), Southwest Airlines (NYSE:LUV), Super Micro Computer (NASDAQ:SMCI), Vistra Energy (NYSE:VST), Prologis (NYSE:PLD), and Vulcan Materials (NYSE:VMC).