Investors are increasingly worried about stagflation, just like Goldman Sachs GroupAs David Kostin, chief US equity strategist, wrote on his blog, "stagflation is the most common word in client conversations this week as stock market volatility continues to rise."

Although Kostin reiterated that "stagflation is not the basic expectation of our economists", his economic team has just raised inflation expectations again and lowered GDP forecasts. "the weak historical performance of the stock market in a stagflation environment helps explain why investors are so worried," he added. "

However, Goldman Sachs Group remains bullish on the stock market and said the decline would be a good opportunity to buy.

How weak are American stocks during stagflation?

Goldman Sachs Group said that over the past 60 years, the median quarterly real total return of the S & P 500 index was + 2.5%, but in a stagflation environment, the quarterly rate of return fell to-2.1%, which is lower than slower economic growth or Qualcomm Inc.The rate of return in an inflated environment is still low.

Kostin pointed out that "US equity investors have hardly experienced stagflation in recent decades", and the main feature of stagflation is deflation.

Kostin defines a "stagflation period" as two or more consecutive quarters, with core CPI growth at least 50 basis points higher than consensus long-term expectations, while real GDP growth is 50 basis points or more below trend.

The chart shows that the United States has met these standards in 41 quarters (17%) since 1960, but the vast majority of them occurred between the late 1960s and early 1980s. In the 21st century, there has been almost no stagflation in the United States, until now.

In past periods of stagflation, much of the weakness in the stock market can be attributed to pressure on corporate profit margins. This is because in a stagflation environment, it is difficult for companies to raise prices rapidly to offset rising input costs, resulting in declining profit margins and real profits.

In addition to the negative factors in earnings, Goldman Sachs Group also pointed out that during the period of stagflation, the price-to-earnings ratio fell slightly as interest rates rose.

Who is the winner and who is the loser during stagflation?

At the industry level, energy and health care usually produce the strongest returns during stagflation. That may explain why the energy sector has been the strongest in the market over the past month, up 14 per cent on the back of rising crude oil prices.

Goldman Sachs Group pointed out that in a stagflation environment, industrial stocks and information technology stocks tend to perform worst. The IT industry is not as cyclical as it was during the stagflation of the late 1960s and early 1980s because it includes more software and service companies. However, the increase in growth companies has also made the industry more sensitive to real interest rates.

Kostin acknowledges that if investors expect the central bank to raise interest rates to fight inflation, the technology industry may still be vulnerable to stagflation.

French Societe GeneraleAlbert Edwards, a star analyst at the bank, said last week that global technology stocks had been "linked" to US 30-year bond yields since the start of the year. If us 30-year bond yields rose to 2.4 per cent from the current 2.1 per cent, the price of technology stocks would fall by about 15 per cent, he said. If us 10-year bond yields rise to 2.25 from the current 1.5 per cent, technology stocks will fall into a bear market.

In the stagflation environment, the difference of consumer behavior also affects the income of the company. Goldman Sachs Group points out that during stagflation, consumer services such as catering and entertainment outperformed commodity industries such as clothing and retail by more than 100bp, while in other periods they were roughly the same. The coming stagflation may explain why consumer goods companies have lagged behind the S & P 500 since May.

Historically, stagflation exerts pressure not only on economic growth, but also on the growth of household wealth. Since 1960, the median quarterly real growth rate of household net worth has been 0.5 per cent, but only 0 per cent during stagflation. The share of household equity assets fell during stagflation, which also helps explain the weakness of the stock market. During stagflation, the real price of a house usually falls, while gold appreciates.

Despite admitting that stagflation has almost arrived, Goldman Sachs Group still believes that "inflation is temporary." Goldman Sachs Group expects "the stock market will continue to rise" and the S & P will rise to 4700 by the end of 500. The bank also believes the decline will prove to be a good buying opportunity.

However, Goldman Sachs Group's traditional bullish view and Morgan StanleyA major divergence has emerged between the increasingly bearish outlook. Morgan Stanley equity strategist Wilson last week predicted that the stock market would fall by more than 10 per cent. Morgan Stanley also expects the S & P 500 to be 4000 by the end of the year.