As inflation continues to affect the US economy, Barclays analysts cautioned investors about the looming specter of stagflation, where sluggish growth coincides with stubbornly high inflation.
While they deem a full-blown stagflationary scenario in the US economy as unlikely, they stress the potential risks for equities arising from a combination of weakening demand and persistent inflationary pressures.
The primary concern, according to Barclays, lies in the looming margin pressures driven by negative operating leverage.
As demand softens and inflation remains resilient, companies that previously managed to raise prices in tandem with inflation may find themselves grappling with dwindling pricing power.
The bank’s analysts believe companies that were able to raise prices alongside inflation “are likely to get hit by deteriorating price elasticity as final demand falls since input cost inflation tends to be stickier.”
Furthermore, they identify sectors and stocks most vulnerable to these dynamics, highlighting Staples, Autos, Durables, and Capital Goods as particularly exposed. Through an analysis of excess sales and pricing power, they pinpoint companies that may struggle to navigate the shifting economic landscape.
Among the 44 stocks flagged as high-risk are industry giants like Albermarle, D.R. Horton, Deere (NYSE:DE), Walmart (NYSE:WMT), Costco (NASDAQ:COST), Ralph Lauren (NYSE:RL), Caterpillar (NYSE:CAT), Kroger and Colgate-Palmolive.
“The screen outperformed the S&P 500 during the peak inflation period of 2021-2022, but underperformed as disinflation took over in 2023,” said Barclays. “The basket has still outperformed the S&P 500 since December 2020, so we believe there could be more downside if inflation sticks around while growth decelerates.”