AlphaRank Top Stocks -The Curious Case of Rising Inflation Expectations

February 21, 2025 — In late 2021, equity markets were rockin’ on the back of a bear market recovery from the Covid market panic and the expected commencement of a rate cutting cycle from the Federal Reserve, spurred by forecast declining inflation.

Then, investors got side-swiped.

Inflation surged in 2022, peaking at 9.1%. Not only were rate cuts off the table, but the Fed increased its federal funds rate by 125bps, punishing both equity and fixed income investors alike and sending U.S. stocks and long-term bonds into a bear market.

Spanish philosopher George Santayana once stated, “those who don’t know history are destined to repeat it.”

The history lesson taught by the capital markets in 2022 is worth studying, given that sticky U.S. inflation is one of the most significant risks facing investors today.

Rising inflation risk is typically adverse for investors because it can erode corporate profits and reduce consumer purchasing power, weighing on economic activity and pressuring stock valuations. In addition, inflation leads to higher interest rates, which investors use to discount forecasted corporate cash flows, leading to reduced intrinsic values. This discounting dynamic is particularly burdensome for growth stock valuations, which take the brunt of the damage of higher rates given their expected profits are much further in the future, resulting in significantly lower net present values when discounted at a higher rate.

Moreover, unruly inflation fosters economic uncertainty, making it harder for investors to forecast company earnings and discount rates. Given that the broad equity market index is dominated by large-cap growth stocks, it is no wonder that sticky inflation is at the top of mind for allocators.

The U.S. Federal Government has not helped the problem, as it is the primary source of inflation. As the legendary, Nobel-prize winning economist Milton Friedman once stated, “inflation is a monetary phenomenon. It is made by or stopped by the central bank.” Over the past five years, the M2 money supply has increased by more than 40%, rising from $15.3 trillion to $21.5 trillion. Another Friedman quip: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Under the Biden administration, U.S. government spending surged, hitting $6.9 trillion over the past twelve months. The current rate of annual expenditures is nearly double the historical trend. Last year, the U.S. federal government took in $4.9 trillion of revenue, leading to a deficit on nearly $2 trillion. This stunning level of deficit, at 6.5% of GDP, represents war-time or deep-recessionary spending. To occur in a relatively peaceful period is unprecedented.

What plugs the hole of this deficit spending? Money printing, of course.

While the Department Of Government Efficiency (DOGE) aims to cut $2 trillion from the U.S. government’s budget, it faces an uphill battle. The top five largest categories of federal spending include social security, Medicare, defence, Medicaid, and interest expense on government debt. These line items may prove extremely difficult and, in some instances, impossible to cut.

While the market had believed that the Fed had gotten the upper hand on inflation, as the central bank managed to cut its benchmark rate by 100bps over the past five months, its lead may be slipping.

Recent inflation readings do not bode well for central bankers, and market expectations for increased inflation have been rising markedly. Trump’s recently launched trade wars, featuring a new tariff strategy seemingly every week, are not helping the inflation battle. Currently, 2-year inflation swaps hit 2.8%, up from the Fed’s target inflation rate of 2.0% five months ago.

With rising inflation expectations, market prognosticators are rapidly trimming their rate cut bets. Implied by the 30-Day Fed Funds futures price, the market is pricing in just one rate cut this year, in line with the FOMC’s December dot plot projections. Furthermore, the market implies a 17% chance of no rate cuts from the U.S. central bank this year, a scenario that would most likely disappoint stock investors.

Nevertheless, things can turn on a dime, and investors should expect the unexpected. Historically, bear markets have typically emerged from “unknown unknowns” — risks or events that we are not even aware that we don’t know about. Therefore, investors should allocate such that their portfolios are prepared for unexpected downside events, whether it be inflation, trade wars, or something completely out of left field.

With that, to facilitate investors and their hedged equity portfolio ideation, we highlight one top-decile stock that is expected to outperform and one bottom-decile stock that is expected to underperform in this month’s AlphaRank Top Stocks.

OUTPERFORM: Lundin Gold Inc (TSX: LUG) owns and operates the Fruta del Norte gold mine in southeast Ecuador, which is among the highest-grade operating gold mines globally. The company’s robust financial performance, including consistent revenue generation and profitability, indicates operational efficiency and effective management. With gold a safe-haven asset, especially during the current uncertain economic environment amidst tariff threats and higher expected inflation, companies like Lundin Gold stand to benefit from potential increases in the price of the yellow metal. LUG trades at a reasonable valuation of 10.3x EBITDA, with an above average return on capital of 59%. Lundin Gold shares have exhibited market-beating momentum, up nearly 140% over the past year. With an AlphaRank of 99.1/100, we expect the stock to continue to outperform. Disclosure: Long LUG in the Accelerate Canadian Long Short Equity Fund (TSX: ATSX) and the Accelerate Absolute Return Fund (TSX:HDGE).

UNDERPERFORM: Sunrun Inc (NASDAQ: RUN) is one of the largest residential solar and battery storage companies in the United States. It provides solar-as-a-service, allowing homeowners to lease solar systems rather than buying the systems outright. Sunrun also sells solar systems directly to customers. The company relies heavily on debt financing and securitization to fund the installation of solar systems, in addition to funding its consistent operating losses. SUN’s significant and rising debt load brings an increasing interest expense in a high interest rate environment, exposing shareholders to dilution risk. SUN’s stock price has been volatile and detached from fundamentals due to the broader “clean energy” hype, which is sunsetting under the Trump administration. Indicative of the stock’s poor prospects, more than 22% of RUN’s shares outstanding have been sold short . With an AlphaRank of 0.3/100, we expect the stock to continue to underperform.

The AlphaRank Top and Bottom stock portfolios exhibited positive performance last month:

• In Canada, the top-ranked AlphaRank portfolio of stocks rose by 2.2% compared to the benchmark’s 4.2% increase, while the bottom-ranked portfolio of Canadian ticked up by 2.0%. The long-short portfolio (top minus bottom ranked stocks) gained 0.2%, as the top-ranked stocks slightly outperformed the bottom-ranked securities. Over the past five years, the top decile AlphaRank portfolio has risen 150%, while the bottom-ranked portfolio has risen approximately 10%.
• In the U.S., the top-decile-ranked equities gained 3.4%, outperforming the S&P 500’s 2.8%. Meanwhile, the bottom-ranked stocks rose by just 1.8%, leading to a 1.6% return for the top decile minus the bottom decile long-short portfolio. Over the past five years, the top-ranked U.S. equities have gained approximately 140%, while the bottom-ranked portfolio has fallen nearly -30%.

AlphaRank Top Stocks represents Accelerate’s predictive equity ranking powered by proven drivers of return. Stocks with the highest AlphaRank are expected to outperform, while stocks with the lowest AlphaRank are anticipated to underperform. AlphaRank assigns a numeric value to each security from zero (bottom-ranked) to 100 (top-ranked) based on selected predictive factors. All Canadian and U.S. stocks priced above $1.50 per share and with a market capitalization exceeding $100 million are evaluated. In both the Accelerate Absolute Return Fund (TSX: HDGE) and the Accelerate Canadian Long Short Equity Fund (TSX: ATSX), Accelerate funds may be long many top-ranked stocks and short many bottom-ranked stocks. See AccelerateShares.com for more information.