Impact of Inflation and Inflation Expectations on Equity Markets in the U.S.

Despite the long length of the discussions on the relationship between inflation, inflation expectations, and assets performance, a unite and recognized consensus still has not been reached. This paper aims to assess whether variation in total returns of U.S. stocks can be explained by inflation related metrics, or not. Within the framework of the paper, the analysis was conducted in three stages. Within the evidence from index, were assessed different specifications of OLS regressions including inflation related metrics and newly introduced anchoring measure (Lansing & Nucera, 2023). Within individual shares evidence (monthly and daily), the assessment was performed by employing Fama-French 5-factor model (Fama & French, 2015) and other factor models as for the reference, controlling for inflation expectations. The key results suggest that under FF-5 specification 8 out of 26 industries of S&P500 have ~20% and more companies, affected by inflation uncertainty. Among them: Retailers, Consumer Goods Conglomerates, Food and Drug Retailing, Fossil Fuels, Cyclical Consumer Products, Insurance, Chemicals, and Utilities. That finding was complemented by the evidence from value-weighted industrial portfolios by French, suggesting for a part of the industries that despite the share of companies, historically affected by inflation uncertainty is low, they account for the major part of the market capitalization. That might be due differences in the level of market competition, cross-sectoral dependence and other factors. The supplementary evidence from daily observations shown that over 30% of companies within S&P 500 Index were historically affected (at 10% level of significance) by inflation expectations, while 6 industries (~23% of the total number of industries) each includes from ~50% to 83% of such companies. However, the result might be limited by the considered bias in BIE. This research contributes to the existing literature by the first attempt to implement anchoring measure, by the first investigation of the impact of inflation and its uncertainty on individual shares level employing factor models, and by broadening the industrial evidence of Albulescu, Aubin, and Goyeau (2017). Another significant contribution is that the paper provides results robust to the inflation expectations measure, as considers its estimations by the Livingston Survey, Survey of Professional Forecasters, the Cleveland survey, Aruoba Term Structure of Inflation Expectations, 5-year ahead Break-even Inflation Expectations.