US equities: Inflation tilt persists – BNY

Geoff Yu at BNY highlights that client flows into United States (US) equities remain geared to inflation risk, even as direct inflation-hedge sectors see reduced inflows. BNY’s iFlow equity inflation style indicator shows a wide gap between inflation-sensitive flows and falling breakevens. Yu argues investors accept energy-led disinflation but still fear labor and tech-driven price pressures, keeping sector allocations defensive.

Flows and inflation beta in sectors

"Client flows into US equities remain sensitive to inflation risk, even as flows into the most direct inflation-hedge sectors have eased. Our iFlow equity inflation style indicator tracks this by estimating the correlation between industry-group returns and changes in the two-year breakeven inflation rate. It then compares that with accelerated flows into the same sectors."

"The break came in May: breakeven inflation fell sharply as energy prices weakened, but that didn’t trigger comparable outflows from industry groups with high inflation correlations."

"The gap between inflation-related equity flows and breakevens is now the widest in 18 months. This suggests clients are willing to accept energy-led disinflation but are less convinced that broader inflation risks have cleared."

"We see this as continued concern around labor markets and other price pressures linked to tech-driven investment. Until those non-energy inflation risks ease, equity flows are likely to remain defensive, with investors reluctant to cut inflation beta in sector allocations."

"Easier financial conditions should also provide support for equities, provided softer inflation reflects supply-side normalization rather than a material weakening in demand."