Tuesday's Market Minute: Who Wins The Reflation Trade?

Reflation has become one of the hottest buzzwords over the last six months since Americans began getting vaccinated and the economy started its process of stabilizing. A term that has been used synonymously with “normalizing” and “reopening,” the reflation trade represents easing restrictions that have hindered growth within the economy. And with earnings season unofficially kicking off Tuesday morning as several big banks are set to report, many investors are wondering who could possibly “win” and “lose” earnings this quarter given the current macroeconomic backdrop.

One of the most notable trends in the first half of this year has been rising bond yields, which many argue is part of the normalization process. But this makes the case that the reflation trade could be strong for securities that historically perform well when rates are on the rise. After a year that ignited growth in highly-valued tech stocks and the “stay-at-home” stocks like Peloton PTON, Zoom ZM, and Etsy ETSY, reflation now seems to favor the more economically stable value names – like metals, industrials, and financials. And while the current market makeup is not necessarily an obvious win for banks, with rates stuck at zero (for at least the near-term), most of the financial companies set to report are faring well given their last year of challenges.

Many banks have run-up in the first half of 2021, signaling their ability to navigate an undoubtedly problematic environment for lenders. This has proved to the Street that big banks are much better this time around relative to 2009 levels. With many big names like JPMorgan Chase JPM, Citigroup C, and Bank of America BAC seeing this momentum, the reflation trade should potentially only continue in this sector going forward.

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