A moderately high inflationary environment can offer a good mise en scène for boosting corporate profits and pushing stock prices up. Historically, annual inflation rates between 3-4% - which we have now - have been followed by an average return on 8.2% in the S&P 500. And when inflation has cooled within its 2-3% target, the return leaps up to 13.6%.
Last week, investors who were hoping for an interest rate cut from the US Federal Reserve sulked as if the central bank had just cancelled Christmas. And perhaps it is disappointing that the Fed left interest rates unchanged for the sixth time in a row as the nation continues to grapple with inflation. However, leaving interest rates where they are for now may not necessarily be a bad thing for an investor. Here's why. If the Fed is standing pat because the economy is doing well and it's just taking a bit longer to tame inflation, that can actually be a good thing for corporate earnings and, in turn, the stock market. In fact, as the chart below shows, a moderately high inflationary environment can offer a good mise en scène for boosting corporate profits and pushing stock prices up. Historically, annual inflation rates between 3-4% - which we have now - have been followed by an average return on 8.2% in the S&P 500. And when inflation has cooled within its 2-3% target, the return leaps up to 13.6% #macrobond
