On June 12, Schroders Global published an article stating that the current inflation rate in the United States is 3.5%, within the range of 3% to 5%. In this inflation environment, defensive types of stocks and investment styles, as well as cyclical sectors such as energy and finance, tend to perform better. Conversely, growth, technology, and non-essential consumer stocks tend to be weaker. However, with inflation gradually falling to below 5% over the past year, these stocks have shown some improvement due to earnings growth. Schroders Global expects the inflation rate to fall to 2% to 3% by 2024, and historical data suggests that growth and technology stocks are likely to outperform the market. In 2023, inflation in the United States dropped significantly, leading to increased expectations for large interest rate cuts by the Federal Reserve (Fed). However, expectations for interest rate cuts have since been reduced from 6 to 7 times to just two times. As the US economy grows robustly and inflation is higher than expected, expectations for interest rate cuts have also decreased. Fed Chairman Jerome Powell recently stated that it will take "longer than expected" to achieve the 2% inflation target. Nevertheless, it is still expected that inflation will fall to 2% to 3% by 2024, and by 2025, the overall US Consumer Price Index (CPI) is likely to fall to a level close to the Fed's 2% target. This could set the stage for the first interest rate cut later in 2024. In an environment of decreasing inflation, how should investors allocate stocks and sectors in their portfolios? How do different stock sectors perform in various inflation environments? During times of high inflation, defensive sectors generally outperform other sectors because the goods and services produced by defensive companies are essential, making them better equipped to withstand inflation. It is worth noting that the communication services sector generally performs poorly in any inflation environment. Meanwhile, cyclical sectors such as energy and finance typically perform well during times of high inflation. The returns in the energy sector depend on the prices of oil and natural gas, which are important components of the CPI. In a high inflation and high-interest rate environment, banks' net interest income (profits earned from loan rates higher than deposit rates) increases, making financial stocks usually perform well. In contrast, during low inflation environments, technology stocks and non-essential consumer goods stocks often perform better as interest rates decrease with declining inflation. Since most of the revenue from technology stocks depends on future earnings forecasts for companies, they are sensitive to rising interest rates and are calculated at a higher discount rate for future cash flows. In the consumer goods industry, many companies rely on technology to support and drive business growth. Additionally, when inflation rises, consumers typically prioritize spending on necessities over non-essential goods and services. How do different types of stocks differ in various inflation environments? During times of high inflation, defensive stocks tend to perform better. Stocks with low volatility and high dividend yields generally hold more shares in defensive industries. High dividend yield indices and value stock indices hold a larger proportion of energy stocks, which benefit from rising inflation. When inflation is low, stocks with strong cyclical characteristics, such as growth and quality categories, generally perform better, as they often include more technology stocks. However, when inflation is high, the performance of growth stocks will be weaker, while the performance of quality stocks is not as clear. This may be because quality stock indices hold a larger proportion of defensive stocks, and thus are less impacted by inflation shocks. On the other hand, small-cap stocks have similar characteristics to defensive stocks, performing relatively well during times of high inflation. This may be because the investment strategy for small-cap stocks has a higher proportion of defensive stocks and financial stocks. In comparison, the performance of small-cap stocks often lags behind large-cap stocks when inflation is low.