The U.S. economy may experience a stretch of robust job growth paired with lingering underlying inflation in the months ahead, according to Wolfe Research analysts.
In a recent note, the team led by Chris Senyek suggested that if this outlook materializes, the Federal Reserve would likely maintain its current interest rate range of 4.25% to 4.5%.
Under this scenario, the strategists advised investors to favor technology and communication services stocks — sectors that have benefited from the ongoing excitement over substantial planned investments in artificial intelligence — along with traditionally defensive areas such as consumer staples and utilities. These “defensive” segments are known for delivering steady performance even during economic slowdowns or periods of market turbulence.
“Our sense is shocks in hotter-than-expected inflation data likely [lead] to short episodic periods of risk-off, while thematically the AI spending narrative continues to come in strong, favoring those most levered to the trade,” the analysts wrote.
The note also outlined three additional economic possibilities.
One is a stagflation scenario, featuring sluggish employment growth alongside faster price increases. Described as “one of the biggest” market risks for the second half of 2025, this outcome could emerge if tariff-driven cost pressures keep inflation elevated, prompting the Fed to hold rates steady. In that case, staples, utilities, and select growth stocks could be better positioned.
A more optimistic path would bring strong hiring and slowing inflation. Such conditions could encourage the Fed to lower borrowing costs, boosting performance in economically sensitive sectors of the S&P 500 like consumer discretionary, financials, semiconductors, and transportation.
The final possibility envisions a broader economic slowdown with easing inflation and softer job growth. According to Wolfe, the Fed would likely cut rates here as well — potentially more sharply than in other cases. Once again, technology, communication services, utilities, staples, and financials would be favored in this environment.
Alongside these projections, Wolfe Research flagged several companies that fell short of both revenue and earnings expectations last quarter and are facing downward revisions to full-year profit forecasts. The list includes Tesla (NASDAQ:TSLA), Kimberly-Clark (NASDAQ:KMB), MetLife (NYSE:MET), Southwest Airlines (NYSE:LUV), Super Micro Computer (NASDAQ:SMCI), Vistra Energy (NYSE:VST), Prologis (NYSE:PLD), and Vulcan Materials (NYSE:VMC).
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