The stock market is showing signs of potential inflationary pressures as the new year unfolds, raising concerns among investors about the prospects for 2026. Tom Essaye, founder of Sevens Report Research, highlighted alarming trends in a note released on Friday, indicating that both energy and materials sectors have surged since the year’s start, with stock prices increasing by more than 9%. This significant growth starkly contrasts with the S&P 500’s modest gain of approximately 1%.
Essaye emphasized that energy and materials stocks can serve as bellwethers for inflation, given that rising prices in these sectors often correlate with increased costs across various areas of the economy. He stated, “Energy is obviously a critical input to inflation metrics as oil and gas prices impact every aspect of global trade, travel, and logistics.” He elaborated that while materials might receive less attention, they equally influence input costs, thereby exerting upward pressure on inflation.
Despite the current Consumer Price Index indicating a year-over-year inflation rate of 2.7% as of December, which exceeds the Federal Reserve’s target of 2%, it remains considerably lower than the peaks witnessed in 2022. The earlier inflation surge prompted aggressive interest rate hikes by the Fed, resulting in a 25% decline in the S&P 500 that year.
The significant performance in the materials and energy sectors also signals a broader market trend shifting from growth to value, with a discernible move away from mega-cap stocks toward smaller companies and transportation stocks. Essaye noted the notable outperformance of indexes such as the S&P 500 equal-weight index, Russell 2000, and Vanguard Value Index. He pointed out this rotation mirrors the early dynamics of 2022, a year characterized by grim returns for traditional 60/40 equity/bond investors.
Essaye elaborated that these early-year money flows are concerning, as they echo the troubling start of 2022. The current sector performance may hint at a similar trajectory for 2026, further compounding investor unease.
Market expectations presently lean towards a subdued inflation landscape for the upcoming year, with pricing indicating two potential rate cuts from the Federal Reserve. However, JPMorgan has cast doubt on these assumptions, warning that no rate cuts are anticipated in 2026. Instead, the bank forecasts that the Fed may take a more hawkish approach, with the next interest rate adjustment possibly being an increase in 2027.
As investors navigate these turbulent signals, the unfolding economic landscape remains fraught with uncertainty, emphasizing the need for careful scrutiny of market trends and indicators in the months ahead.
