Research Affiliates explores how inflation dynamics can be used to predict future equity returns, focusing on whether inflation cycles and surprises contain useful signals for investors. The paper argues that falling or negative inflation regimes have historically preceded stronger equity returns, challenging the common view that inflation is always harmful for stocks.
Predicting Equity Returns With Inflation
Research Affiliates
Jim Masturzo, Michele Mazzoleni
Research
13 Pages
Key Takeaways
Negative Inflation Signals: Periods of negative inflation cycles and surprises led to higher excess equity returns, with spreads exceeding 4%–6% versus risk-free rates across historical samples.
Timing Strategy Results: A strategy buying equities during negative signals and selling otherwise improved returns by roughly 2%–3% annually compared to a passive benchmark.
Sector Rotation Edge: Sector-level dispersion shows predictability differences up to 30%, enabling rotation strategies that enhance returns versus broad market exposure.
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