Fears of hotter inflation are rippling through markets.
While bond yields are on a steady upward march to multiyear highs, inflationary pressures are now also being seen and felt in the stock market.
A new class of stock winners and losers has emerged in the past month, driven by two competing narratives. On the one hand, the AI boom is still going strong, with tech firms reporting strong earnings and trumpeting optimistic visions for future growth.
On the other hand, inflation is threatening to crash the party. Consumer prices grew at their fastest pace in three years in April, and investors are worried they could rise faster as the oil price spike works its way across the economy.
The result has been a growing bifurcation in the market that could be unsustainable, market pros told Business Insider.
The spread between the market’s best-performing sector (information technology) and worst-performing sector (financials) rose to 25 percentage points on Monday.
Tech is leading the market, with the sector up 17% in a month. Those gains are followed by a 6% increase in energy and a 4% increase in consumer staples, two areas that are thought to benefit from higher inflation and the recent oil price spike.
Meanwhile, materials, financials, consumer discretionary, and communication services were among the market’s biggest losers.
Peter Berezin, the chief global strategist at BCA Research, told Business Insider the divide between the market’s underperformers and overperformers was largely due to a “perfect storm” of inflationary pressures.
For one, investors are weighing the impact of the latest oil price shock, which could feed price growth in other areas of the economy, he said.
Second, though AI is expected to be disinflationary over time, hype for the technology is currently stoking inflation, Berezin said. He pointed to prices for semiconductors, chips, and other data center components, which have risen alongside demand.
Third, investors have lingering uncertainty regarding Kevin Warsh, the Fed Chair appointed by Donald Trump and confirmed by lawmakers last week. While he’s been more hawkish in some regards than markets expected, there’s still some concern that Warsh could lower rates prematurely.
“I think all these three things are coming together at a time when inflation was running above target even before 2026,” Berezin said, pointing to how pain was concentrated in key corners of the market.
- Materials. Hotter inflation is raising costs for many materials firms, which is causing investors to downgrade those stocks, Berezin said.
- Financials. The sector, which is sensitive to rates, is indirectly impacted by inflation concerns, Berezin added. Hotter inflation could lead to higher rates in the long-run, which could hit lending and spur higher defaults and delinquency rates among businesses and consumers, he added.
- Consumer discretionary. Consumer-facing stocks will likely bear most of the market’s pain for inflation. Berezin referred to the possibility that higher prices could cause consumers to pull back on spending, hurting businesses.
- Communication services. The sector is in decline due to its exposure to consumers, Berezin said. He pointed to how some users may cancel subscriptions to streaming services as one example of how communications firms could be affected.
The winners
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Energy & consumer staples: Inflation hasn’t been as much of a headwind for these sectors.
The outlook has brightened for energy firms alongside the spike in oil prices, making the firm a beneficiary of recent inflationary pressures.
Inflation can also be a bullish factor for some consumer staples companies, as higher prices can boost corporate profits, José Torres, a senior economist at Interactive Brokers, told Business Insider.
- Technology. Strong earnings and a slew of dealmaking have powered the tech sector higher. The iShares Semiconductor ETF, one particularly salient area of the market amid the AI boom, is up 19% over the past month.
The growing divide has led to a mixed outlook for markets.
In a note to clients on Monday, BCA Research said it believed the US economy looked like it was exiting the “slowdown” phase and entering a new “expansion” phase. The research firm pointed to both strong revenue, earnings, and capex growth, which have fueled most of the gains in the tech sector, but also flagged the risk that inflation concerns could “intensify.”
Strategists on JPMorgan’s market intelligence team said they are still bullish on stocks overall, but with “reduced conviction,” pointing to how inflation concerns recently sparked a historic sell-off in bonds.
“Bond vol is anathema for stocks and we are seeing it real-time,” the bank said in a note. “We remain Tactically Bullish, but we would not maximally net long given the elevated probability of a pullback led by Tech.”
Rate-sensitive and cyclical areas of the market will likely continue to struggle, Torres said.
“Those areas have been essentially blocked from achieving further upside because they can’t really run much higher when you have rates this elevated and inflation,” he said. “So really, investors have been insulating themselves with tech and semiconductors.”
Torres added that he believed the split between stocks looked unsustainable, and with the market’s best performers likely encountering future challenges unless rates were to come down or if the Strait of Hormuz were to reopen, which would cool down oil prices.
“I expect that rates are a huge sentiment reverser,” he said, speculating that a correction is possible in the near future.