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If your group chat has gone from “should we book a trip?” to “I paid $7 for berries and my landlord is hiking up rent” you might not be the only ones.

Right now, Australians are being dealt a tough hand.

Inflation has been creeping up (making everyday essentials like rent, groceries, and bills, more expensive) and at the same time, the economy is slowing down.  

In fact, there’s a name for this uncomfy situation we’re in and it’s called ✨stagflation✨

What exactly is stagflation?

Stagflation is when economic growth slows down while prices keep rising.

Normally, inflation shows up when the economy is booming but stagflation flips that on its head - things get more expensive, but wages, jobs, and growth remain the same… or even slow down.

And that’s not all. On average, stagflation is the worst kind of environment for the stock market.

Yup, it’s not a vibe.

Why is stagflation challenging for companies and investors?

When the economy slows down, people start to feel the financial pinch pretty quickly. That usually means cutting back on spending, which then feeds back into weaker economic growth.

At the same time, businesses are dealing with rising costs. In a strong economy, they can usually pass those costs on to customers without too much drama. But when demand is already weak, that gets a lot harder so profit margins take the hit instead.

And this is the classic stagflation cycle - people spend less because times are tough, businesses earn less because people spend less, and the economy struggles to get back on its feet.

So… are stocks in trouble?

Short answer: not necessarily.

Historically, stock market returns during stagflation have been weaker but not disastrous.

Graph: US stock market returns in years when inflation and economic growth are above or below their 10-year averages (1926–2025)

As expected, stocks tend to have a tougher time during stagflation compared with other economic environments, but it’s not all bad.

Since 1926, the median real return for equities during stagflation years is roughly 0%.

That’s lower than the long-term expectation for stocks, but it also means investors were, on average, at least keeping up with inflation.

The data also shows:

• In about half of stagflation years, stocks still delivered positive real returns
• When returns were positive, they were often strong (averaging around +16%)
• But when returns were negative, it was really down (averaging around –14%)

So… what does that mean for investors?

While it might be tempting to move into cash to avoid the volatility, cash might not be the safe haven investors believe.

When inflation is high, cash quietly loses value. That’s why, stocks have historically outperformed cash more often than not during stagflation periods.

This takes us back to a core investment principle: diversification.

Data shows that some sectors do better than others during stagflation periods.

Graph 2: US sector returns during stagflation years (1974–2025)

Sectors that tend to perform better:

• Energy & materials (benefits from higher prices)
• Utilities & consumer staples (where demand is less sensitive to economic cycles)
• Health care and real assets such as real estate (has potential to perform well but results have varied over the years)

Sectors that tend to struggle:

• Tech (valuations get hit by higher interest rates)
• Consumer discretionary (people cut back on surplus spending)
• Financials (hurt by yield curve issues)

Opportunities with active investing

In normal market conditions, broad market exposure (like passive index investing) can do a lot of the heavy lifting.

But stagflation is different. Instead of markets moving together, returns tend to spread out more across sectors and individual companies.

In this kind of environment, active strategies have potential to add value since managers have more opportunities to overweight resilient businesses (like defensive sectors or companies with pricing power) and underweight those more exposed to rising costs and weak demand.

Schroder Global Equity Alpha Fund is designed to navigate economic cycles as they unfold, identifying companies that are benefiting from these shifts rather than being disrupted by them.

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