by Natalia Kniazhevich
There have been few winning strategies to seek refuge in as the stock rout sparked by President Donald Trump’s start-stop tariff war drags on for a third week. One, though, is soaring right now: a pair trade that bets on stocks that thrives in an economy sinking into stagflation.
A Goldman Sachs Group Inc. basket bets on strength in commodities and defensive sectors like health care, and is short on the consumer discretionary sector, semiconductors and unprofitable tech stocks. As of Tuesday, it’s the bank’s best-performing US long-short basket in 2025, up nearly 20% compared to the S&P 500 Index’s 5.3% decline.
Data released on Wednesday gave traders some relief, showing US consumer prices rising at the slowest pace in four months. However, some investors remain concerned that import levies could bring on stagflation, where rising costs collide with weak economic growth.
“All our policy analytical work says that if you get tariffs for any length of time on the order of what is already being proposed and considered, that’s a recipe for much slower growth and much higher inflation,” said Julian Emanuel, chief equity & quantitative strategist at Evercore ISI.
Evercore said stagflation occurs when US gross domestic product growth falls below 1.5% annually while inflation — the core personal consumption expenditures index — rises above 3%. That scenario would trigger the firm’s bear case, where the S&P 500 could fall to 5,200 by year-end, from about 5,600 now.
Souring sentiment has already prompted a number of economists to cut their outlooks on the US economy. Goldman’s Jan Hatzius on Monday slashed his GDP forecast for 2025 to 1.7% from 2.4% and boosted his inflation outlook. And Wall Street strategists are getting more pessimistic about the performance of US stocks.
Guidance from blue-chip US companies has been deteriorating as well. Two of the biggest US airlines have slashed their forecasts, while Walmart Inc., a barometer of US consumer strength, also warned of weakness ahead.
Who are the winners in a stagflation scenario? Typically, they’re stocks that generate steady cash flows no matter how weak the economy is. Defensive sectors like health care, energy and consumer staples have been the top S&P 500 performers in 2025.
“We like our “stagflation” long/short pair basket for investors looking to reposition their portfolios and hedge against rising possibilities around stagflation,” Faris Mourad, vice president of Goldman’s US custom baskets team, wrote in a note to clients on Monday. The basket hasn’t outpaced the S&P 500 on a full-year basis since 2022, when the Federal Reserve started ratcheting up interest rates aggressively to tame inflation.
David Lin, CEO & founder of Linvest21, recommends focusing on companies with stable consumer demand that can successfully pass costs on to consumers. Lin said utilities and healthcare stocks could perform well thanks to favorable regulatory environments.
According to Lin’s AI-driven portfolio models, consumer staples giants Johnson & Johnson and Procter & Gamble Co. might outperform in a stagflationary environment due to their diversified product portfolios.
In the energy sector, Lin sees NextEra Energy Inc. as well-positioned to capitalize on growing renewable energy demand, which he expects to remain resilient in the face of an economic slowdown or rising inflation.
Copyright Bloomberg News
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