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Headline inflation numbers should meaningfully decelerate in the coming months. And as they do, tech stocks will lead a huge market comeback
Folks, I know I don’t need to tell you this, but here it is anyway. The mainstream media always seems to get it wrong. Yesterday, for example, I read dozens of articles about the March Consumer Price Index (CPI) report. Almost all of them talked about how last month, inflation powered to its highest levels since 1981.
That’s technically true, but it also doesn’t get at the real story.
And what is that, you might ask?
That inflation has peaked.
I bet you didn’t read that in many places yesterday, but it’s true. Inflation is peaking. And over the next few months, inflation will decelerate.
That’s why you should be buying tech stocks right now. Inflation has been the bane of tech stocks for several months. But reduce it, and those stocks will power higher.
And one specific group of tech stocks should win particularly big as inflation decelerates over the next few months.
Let’s find out.
Core Inflation Rates are Decelerating
The CPI report for March was released yesterday morning. To recap, the CPI measures the price of a basket of goods in the U.S. economy. And it’s the market’s preferred gauge of inflation.
The headline numbers from the March CPI were quite hot. On a year-over-year basis, CPI rose at its fastest pace since 1981.
But just as you were told never to judge a book by its cover, the same goes here. Never judge a CPI report by the headline numbers.
Indeed, the underlying trends in yesterday’s report didn’t scream “red-hot inflation.” Instead, they screamed “decelerating inflation.”
Specifically, the core CPI — which excludes volatile food and energy prices — rose just 0.3% month-over-month in March. That missed expectations for a 0.5% increase. It marks the second consecutive quarter of decelerating month-over-month inflation and is the slowest rise since September 2021.
In other words, on a core basis, inflation rates are quickly decelerating to not-all-that-worrisome levels.
Has inflation peaked? That’s what a lot of folks on Wall Street were saying yesterday.
Ben Jeffrey, U.S. rate strategist at BMO, said that “maybe the peak core inflation is behind us.”
Meanwhile, DoubleLine Capital CEO Jeffrey Gundlach said, “I think we are near peak inflation.”
If they’re right, then that means tech stocks are due for an enormous rally over the next few months. Inflation is a huge headwind for those stocks, and removing it could spark a big rebound.
So, are those Wall Street experts correct? We think so.
Why Inflation Will “Cool Down”
Right now, the mainstream media narrative is centered around incredulity at how high inflation is today.
But in a few months, we believe that narrative will do a complete 180. That is, we think that by summer, the mainstream media will instead be incredulous at how fast inflation is dropping.
We believe this shift will materialize for a few reasons.
First, the current core inflation trend is hard to argue against. Core inflation rates are decelerating to multi-month lows. That’s inarguable.
We believe the data here is very telling.
Second, this decelerating trend emerged despite the Russia-Ukraine war and new lockdowns in China. Those were supposed to be hugely inflationary phenomena. Yet, in the first full month of both those events, U.S. inflation rates almost plateaued month-over-month.
We believe that the market broadly overreacted to those events’ inflationary potential.
Third, supply chain pressures are easing. For the past several months, the New York Fed’s Global Supply Chain Pressure Index has indicated decreasing global supply chain pressures as countries ease their Covid-19 restrictions. Yes, China, a global production hub, just went back into full lockdown. But the most recent news flow from that country is a reduction of Covid-19 lockdowns in Shanghai – which we think is the first step toward the Chinese government adjusting its zero-Covid policy.
We believe global supply chains will increasingly normalize as we get further into 2022.
Fourth, commodity prices are easing. Throughout March, oil averaged north of $110 per barrel. Now it’s struggling to break $100 per barrel. Granted, core inflation does not consider the price of oil. But if core inflation is decelerating, then in April/May, it should couple with decelerating commodity prices from March levels. And that should lead to increasingly lower headline inflation numbers.
We believe commodity prices will trend lower and/or stabilize at lower-than-March levels for the duration of the year, helping to push inflation numbers down.
Fifth, the laps are about to get hard. Core inflation is decelerating right before the year-over-year laps start to get difficult. This is something we’ve pointed out before. CPI has been lapping against easy comparables of 0% to 1.5% inflation readings from the year-ago periods. It’s easy to put up big CPI numbers against such painless laps. But it’s much harder to put up big CPI numbers against onerous laps – and they’re about to get way tougher.
April is lapping against a 4.2% rise in CPI. From May to September, the lap is 5% to 6%. In October and November, it’s above 6%. And in December, it’s 7%.
We believe that as the laps get tougher, inflation numbers will fall quite dramatically.
Overall, we do believe that we are at or near “peak inflation.” If true – and if readings do decelerate in the coming months – that will provide a huge tailwind for tech stocks to stage some big rallies.
In fact, we think one group of tech stocks could double over the next 12 months as inflationary pressures ease.
The Final Word on Tech Stocks
Over the past 12 months, the investment narrative on Wall Street has been dominated by inflation. Every month, it seems inflation is only getting increasingly hotter. And each month it heats up, tech stocks go down.
That trend is about to reverse course in a big way.
We believe March marked “peak inflation.” We fully expect headline inflation numbers to meaningfully decelerate in the second and third quarters. As they do, we think the stocks most heavily impacted – tech stocks – will lead a huge market comeback.
But not all tech stocks are created equal.
Some tech stocks will rally 10% or 20% over the next 12 months. Others will double… or more.
Which will double? The fastest-growing tech stocks. Those hyper-speed growers were hit hardest when inflation was accelerating. Now they’ll rebound fastest as inflation decelerates.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.