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(Bloomberg) -- 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 thrive in an economy sinking into stagflation.
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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.
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“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.