Here's a top firm's investing playbook before the US economy enters a red-hot inflationary growth cycle

Get ready for the US economy to burn hot this summer.

That’s the new advice from Stifel, with strategists at the firm eyeing a “running hot” setup for the US economy — that is, a dynamic in which economic growth heats up alongside inflation.

In a client note on Tuesday, the firm pointed its proprietary macro model, which showed that the US economy’s “growth impulse” was booming, while the economy’s “inflation impulse” had moved sharply into “hotter” territory.

That reflects a specific combination of macro conditions expected to rejig the investment landscape, strategists said, laying out what they believed was the ideal playbook for investors to adopt in the current climate.

The firm also said it was bumping up its S&P 500 target for the year to 7,800, implying around 4% upside from the benchmark index’s current levels.

“Our sector strategy is based on our economic views: the US economy is ‘running hot’ and stock indices are reflecting our bifurcating ‘Tale of Two Economies’ view,” a team led by Thomas Carroll, Stifel’s vice president of institutional portfolio strategy, wrote in a note. The firm referred to the idea that the US economy is splitting into two distinct narratives, with the AI trade still booming though US consumers are under more pressure from higher inflation.

Here’s what Stifel thinks investors should do next, according to its three-part market playbook:

1. Investment-oriented cyclical industries

The firm said it was bullish on investment-related cyclical stocks, which include firms in sectors like banking, transportation, materials, energy, semiconductors, and software and equipment.

Investment in the AI trade has shown no signs of stopping this year, despite some concerns that companies may be pouring too much into the AI buildout without a clear return on investment. Amazon, Microsoft, Meta, and Google are now planning to spend a collective $725 billion on capex in 2026, around $100 billion more than what was previously projected.

“Booming AI fixed investment is outperforming squeezed consumers,” Stifel wrote.

Lean away from consumer-linked industries

Stifel pointed to recent weakness in sectors like consumer discretionary, consumer staples, communications, and financial services.

Communications and consumer discretionary are among the worst-performing sectors of the S&P 500 this year.

“Negative EPS revisions signal the avoid playbook’ inflation-squeezed Consumer-led downgrades,” the firm wrote of those areas.

3. Value stocks, with defensive hedges

Stifel also said it favored value stocks, with a hedge in defensive sectors of the market.

Value stocks haven’t kept pace with growth stocks this year, though value areas of the market have outperformed recently amid the selling pressure in tech. The iShares S&P 500 Value ETF is relatively flat over the last month, though the iShares S&P 500 Growth ETF is down 3%.

On the defensive side, Stifel pointed in particular to sectors like insurance, autos, energy, and banks, all of which tend to benefit when growth runs hot alongside inflation.

“We prefer ‘Running Hot’ Cyclical Value, hedged with Defensive Value,” the firm said. “Value is beating Growth as the US shifts into an Inflationary Boom, favoring ‘Running Hot’ Cyclicals.”