“Investors may need to rethink how they position their portfolios if inflation declines as expected this year and in 2025. The sharp drop in U.S. inflation during 2023 raised hopes for aggressive interest rate cuts by the Federal Reserve (Fed). But since then, the market has gone from expecting six to seven rate cuts to just two,” warn Tina Fong, strategist at Schroders (LON:SDR), and Ben Read, economist at Schroders.
“With more resilient economic growth and higher-than-expected inflation, expectations for rate cuts have decreased. Fed Chairman Jerome Powell recently stated that the central bank is taking ‘longer than expected’ to reach its 2% inflation target,” these experts point out.
That said, according to Schroders analysts, “inflation is still expected to fall to 2-3% this year and for the overall U.S. CPI rate to approach the central bank’s 2% target by 2025. This should pave the way for the first rate cut to occur by the end of 2024.”
What are the equity styles and sectors?
In a world where inflation tends to decrease, how should investors position their portfolios in terms of equity sectors and styles? Before delving into how different inflationary environments affect the performance of equity sectors and styles, Table 1 summarizes the different equity styles.
