Stagnation and shadows hang over Wall Street: Defense sectors become safe havens, fears of market uncertainty after CPI report.

Notice that, as the shadow of stagflation spreads in the stock market, investors are closely watching the upcoming consumer inflation report to assess the likelihood of this grim economic scenario becoming a reality. The combination of slowing economic growth and rising price pressures has not yet become the baseline scenario for investors. However, the latest government report showing cooling hiring activity and a resurgence in service sector inflation is starting to dampen market sentiment, increasing uncertainty about the pace of interest rate cuts. JPMorgan strategists wrote in a report on August 5 that the latest economic data "amplified the importance of this week's CPI report". For Carl Shamota, of Corpay, the method of dealing with the risk of stagflation is to stick to defensive sectors such as utilities, communication services, and essential consumer goods, while avoiding growth sectors such as non-essential consumer goods. In his view, the additional challenge comes from balancing rising price expectations with the pressure from U.S. President Trump demanding the Fed to cut interest rates. Corpay's chief market strategist Shamota said, "We are at an inflection point in the economy, and the market is indeed full of uncertainty about the future direction," and "what we need to worry about is a Fed that is no longer focused on its mission of price stability allowing inflation to persist at higher levels for an extended period." Unexpected stagflation causes stock market benchmark index to fall Across Wall Street, concerns about a return to 1970s-style stagflation are alerting economists and strategists, who believe that the Fed may keep interest rates unchanged, thereby eliminating a key catalyst for the stock market. The S&P 500 index, which has risen 8.6% so far this year, fell after weaker-than-expected employment reports and the rise in service sector inflation earlier this month. "In a stagflation environment, cutting rates without clear evidence that inflation has peaked is dangerous," wrote economists at Bank of America in a report, reiterating the view that the Fed will remain on hold despite soft job data. "Stagflation shock" Apollo Management partner and chief economist Thorsten Slok prefers sectors with less macroeconomic uncertainty and less impact from tariffs, such as telecom, healthcare, utilities, and technology. He notes that energy is one of the sectors that could be negatively affected. The sector was a winner in the 2022 inflation cycle, leading the S&P 500 index for two consecutive years as traders sought to hedge against rising oil and gas prices. "Tariff hikes are often stagflation shocks - they increase the likelihood of economic slowdown while putting upward pressure on prices," Slok wrote in a report on Thursday. Brian Jacobsen, chief economist at Annex Wealth Management, favors sectors with lower volatility and positive business and profit trends in this environment, including financials, industrials, and technology companies that behave more like "business necessities" than consumer necessities. He favors Microsoft and Amazon for their cloud computing businesses. However, Jacobsen says he does expect market anxiety about stagflation to diminish in the coming weeks as he expects some of Trump's tax cuts to stimulate investment, potentially offsetting weaker job data in future reports. At least for now, uncertainty remains high. According to the New York Fed's monthly survey, U.S. consumer inflation expectations rose in July. "We believe inflation is a longer-term cycle," said Mark Dodson of Cypress Capital. He added that he expects inflation to accelerate in 2026, and that bond yields and mortgage rates "may not decline as many anticipate when the Fed takes action".