How inflation reshapes stock market valuations

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The impact of high inflation on equity markets is complex and varies by sector.

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Higher inflation typically leads to higher interest rates, which increase discount rates used in equity valuation models. This puts downward pressure on stock prices, particularly for growth-oriented companies whose earnings are expected further in the future.

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Some sectors may benefit from inflation, especially firms with strong pricing power or exposure to commodities and real assets. Financial stocks can also benefit initially from higher interest rates, although rising credit risk may offset gains over time.

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Overall, high inflation tends to increase dispersion across equity markets, with greater differences in performance between sectors and companies.