Outpacing Inflation with Stocks
Inflation is back in the news of late, as the year-over-year change in the consumer price index is at the highest level since 2023 in the US which is the worlds largest economy. This may stoke fears of further inflation for many investors.
It’s important to note that expected inflation is incorporated into the expected returns demanded by market participants. To the extent inflation is expected to impact either future cash flows from an investment, or the discount rate applied to these cash flows, market prices adjust to compensate, resulting in positive expected real returns. This is borne out in historical data. Average real returns for the broad US stock market, based on the S&P 500 Index, have been positive even in years when US inflation was above the historical median. Average real returns for US small cap and small cap value stocks have been even higher, implying investors should not shy away from tilting toward higher expected return stocks even if inflation expectations are elevated.
We believe one way for investors to deal with inflation is to outpace it. Stocks have been a good way to do this historically, as the evidence from the US illustrates.
To review the diversification of your own investments feel free to get in touch.
In USD. US inflation is the annual rate of change in the consumer price index for all urban consumers (CPI-U, not seasonally adjusted) from the US Bureau of Labor Statistics. Nominal return is the rate of return on an investment without adjusting for inflation. Real return is the rate of return on an investment after adjusting for inflation. Real returns are calculated using the following method: [(1 + nominal return) / (1 + inflation rate)] – 1. The Dimensional indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
See “Index Descriptions” in the appendix for descriptions of the Dimensional index data.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
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Will the Magnificent 7 Stay on Top
The Magnificent 7 entered 2025 among the Top 10 largest US stocks. But before making an outsize bet on gains from these technology giants, investors should consider a few lessons from market history.
- It’s hard to stay on top. For example, only three of the 10 biggest companies from 1980 made the 2000 list—and none of them was in 2025’s Top 10.
- Industries ebb and flow. Technology-focused firms currently dominate the list. But in 1980, six of the 10 largest companies were in the energy sector.
- New technology doesn’t benefit only tech firms. Throughout history, companies across industries have used technology to innovate and grow.
Diversification enables investors to share in the success of today’s top companies while staying positioned to benefit from tomorrow’s market leaders.
The Magnificent 7 stocks are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Source: Dimensional, using data from the Center for Research in Security Prices and Compustat. Includes all US common stocks. Largest stocks identified at the end of the calendar year preceding the respective period by sorting eligible US stocks on market capitalisation using data provided by the CRSP, University of Chicago.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
To discuss your financial requirements or obtain other information click below
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UK INFLATION AND INTERET RATE EXPECTATIONS
I am sure you are likely aware of the Bank of England increase to interest rates from 2.25% to 3% yesterday.
We are often asked about Interest rate expectations given that many of our clients have mortgages.
It may be somewhat reassuring that the Bank of England expect key measures of inflation to fall moving forward.
Here a few interesting graphs:
Source: Bank of England
The UK is not alone in tackling inflation/interest rates
as can be seen here:
