Inflation: Both Low And Rising Threaten Valuations

Inflation concerns are turning into quite the balancing act for equity investors. If it stays low for too long it could raise doubts about the country’s long-term growth, but steadily rising inflation has typically driven valuations down and could lead to concerns that the Fed won’t be able to manage inflation while unwinding QE in an orderly fashion.

S&P 500 could be 10% overvalued

“Low inflation, despite aggressive central bank stimulus, has raised concern among equity investors about long-term trend growth. Lowering our trend CPI or GDP assumption by just 10 bp reduces our equity fair value by 1-2%,” writes Goldman Sachs analyst Stuart Kaiser. “Revenue growth has a closer link to inflation than earnings or margins.”

But that 10 basis...