With retail price increases showing no sign of abating, it’s not surprising that inflation remains a major concern for consumers. But it’s also a likely reason why the last few years have witnessed a dramatic surge in stock market participation among middle-class Americans.
Indeed, the last decade has seen what amounts to a polar shift in sentiment toward equities, as the younger generation of Americans (mainly Millennials) initially showed aversion toward traditional stock investing in the wake of the 2008 credit crash—which in turn prompted them to turn to cryptocurrencies as their investment vehicle of choice.
By the late 2010s, however, that generation’s negative view toward stocks reversed course, thanks in part to the advent of zero-commission stock trading introduced by Robinhood and its subsequent adoption by virtually all major online brokerages in 2019.
Additionally, the Covid-related shutdown of 2020 served as the catalyst for broadening stock market participation, as government stimulus checks, combined with the general boredom of millions of homebound Americans, prompted a revival of day-trading and other forms of market participation.
But an even bigger catalyst for the mass revival of interest in stocks was the rapid onset of inflation that followed the Covid era. Based on one measure of inflation—the Consumer Price Index for All Urban Consumers (CPI-U) compiled by the Bureau of Labor Statistics—domestic prices have increased by approximately 30% since 2020.
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That means the purchasing power of the dollar has declined to such an extent that what cost $100 six years ago would cost around $130 today. What’s more, based on alternative “everyday cost” indexes, prices have increased by more than 40% since 2020!
It should come as no surprise then that the same generational cohort which participated in Occupy Wall Street protests 17 years ago has come full circle to embrace equities as an inflation hedge.
And it’s not just inflation-conscious Millennials that have jumped on the stock market bandwagon in recent years. Indeed, a growing number of Americans from virtually all segments of society have discovered stocks as a way to preserve their purchasing power.
As noted by Carl Delfeld of the Cabot Explorer, over the last 15 years, the stock holdings of Americans have sharply increased. He writes, “In 2010, stocks represented about 20% of total household financial assets; that number has grown to 48% today.” Moreover, according to a Gallup survey, nearly 60% of all U.S. adults owned stock as of April 2026—well above the lower participation rates that were seen in the 2010s.
And while inflation hedging isn’t the only reason behind the increased market participation, it’s no doubt a much bigger motivation for it today than it was in the past as the dollar continues to weaken.
That said, the fact that the overall proportion of wealth tied up in equities has surpassed levels seen during the late 1990s Internet stock-driven boom is a concern to many. The ‘90s-era bull market ended in disaster as the Internet stocks eventually crashed, so it’s only natural that a growing number of analysts are drawing parallels to today’s AI-driven market boom, with the inference that the current bull market could end in similar fashion.
However, it should be noted that the late-‘90s Internet bubble ended when, or shortly after, the Internet infrastructural buildout was largely completed in the early 2000s. And by most analysts’ reckoning, the AI infrastructure buildout is still in its early stages, leaving plenty of room to run before the tech stock sector potentially meets the same fate as its ‘90s counterpart.
More importantly than even that consideration is that the presumed driver behind the stock market’s current strength—namely inflation—isn’t likely to diminish in the foreseeable future. Hence, the need for consumers to continue hedging against the loss of purchasing power should persist.
On that score, the Federal Reserve’s recent hike to its benchmark interest rate has led many investors to conclude the central bank’s efforts at fighting inflation will cause rising consumer prices to eventually recede, thus potentially undermining a major support for equities. But here’s the kicker: Fed rate increases are more likely to work if the inflation is demand-driven, i.e., if it’s caused by excessive consumer spending, a wage spiral or an overheated housing market.
Conversely, if the inflation is supply-driven and caused by things like supply-chain or production disruptions, tariffs, shipping price increases or commodity shortages, the Fed’s attempt at controlling it via rate increases is far less likely to succeed. And it’s clear that today’s inflation—or at least a significant portion of it—is supply-driven.
Additionally, higher prices can actually cause certain asset prices to increase further. For instance, higher mortgage rates can dissuade homeowners from selling, thereby reducing housing supply and keeping real estate prices and rents elevated.
For equity investors, this can be interpreted as potentially good news (in a perverse sort of way) since it’s likely to continue supporting the broad market, as investors should still have an incentive to hedge against inflation.
The Stocks and Companies That Will Continue to Benefit from Inflation
The question for investors going forward is whether or not companies can maintain healthy profit margins should inflation continue to boost input costs. My answer is that companies with sufficient pricing power should be able to continue passing those costs on to consumers, but those lacking that power risk margin compression.
Among the industries I expect will succeed in pushing higher costs onto customers going forward are: Energy and oilfield services, data-center infrastructure, health care and related services and utility and energy infrastructure providers. If you’re interested in a closer scrutiny of each of these industries, they are covered in greater depth in the Cabot Turnaround Letter and amply represented in the portfolio.
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