Worries about renewed inflation have been front and center ever since trade tariffs were introduced – and for good reason.
Tariffs function as a tax on U.S. businesses and consumers. And despite claims that they’re “paid” by other nations exporting to the U.S., the true result is higher costs at both the retail and wholesale level here at home.
As shown above, inflation expectations are a prime concern for U.S. consumers. According to the most recent data, those expectations have gone through the roof this year – more than doubling.
But so far, at least, tariff costs have not shown up in the official inflation data.
Just yesterday, the May Consumer Price Index (CPI) came in below expectations, showing a year-over-year rate of inflation of just 2.4% – if the government’s data is to be believed.
Still, cost pressures do seem to be working through the pipeline, according to other independent sources.
Last week, the private sector Institute for Supply Management reported that U.S. service-sector activity slipped into contraction for the first time in nearly a year.
The weakness was due to “an abrupt pullback in demand, while prices accelerated as higher tariffs reverberated across the economy,” according to Bloomberg.
In fact, prices paid by U.S. service-sector businesses increased sharply in May, hitting their highest levels since November 2022 – above right – even as new orders slumped deeper into contraction territory, as you can see above left.
Inflation – or even worse, stagflation – is bad news for both consumers and businesses. For S&P 500 companies, higher costs eat away at profit margins.
Meanwhile, inflation fears can drive up higher interest rates, making every dollar of corporate profits worth somewhat less due to a higher discount rate – ultimately putting pressure on stock prices.
At times like this, investors should focus on quality stocks that have pricing power and consistently strong profit margins. That’s the best antidote to inflation.
Quality stocks typically have good financial strength, lower debt, and plenty of cash-generating ability. Stocks with strong pricing power benefit from low-costs and competitive advantages, allowing them to maintain solid profit margins even as prices rise.
At the crossroads of quality and pricing power are what I call “inflation-resilient” stocks: companies that can maintain profit growth amid higher inflation, or even stagflation periods.
And if you have access to our TradeSmith Screener, you can quickly and easily search for stocks that fit the bill. Here’s how.
Build Your Inflation-Resilient Screener
From your TradeSmith Finance account, simply navigate to Invest > Screener, then click + Add Filter to build your own inflation-resilient stock screener using just three filters:
Health (Green & Yellow Zone): We want to screen for only healthy stocks in our Health Indicator Green or Yellow zones. This applies our proprietary measure of risk — the Volatility Quotient (VQ) – along with other powerful algorithms to help you find stocks that can increase your risk-adjusted returns.
Business Quality Score > 50: This proprietary filter helps guide you to high-quality stocks with more stable earnings, stronger balance sheets, and higher profit margins – traits that tend to outperform other stocks.
Setting the filter to > 50 limits our search to only the top-half of stocks in TradeSmith’s quality rankings.
Free Cash Flow Yield > 6%: This metric is a proven way to identify stocks with strong pricing power and durable profit margins – characteristics that have historically beat the market with less volatility, as you can see below.
Stocks with the highest Free Cash Flow Yield (free cash flow / enterprise value) have historically outperformed the average large-cap stock by a wide margin – while also with less drawdown risk.
The average large-cap stock has a Free Cash Flow Yield of about 3%, so I set our filter to screen for stocks with yields greater than 6%, or twice the average stock.
Simply set these filters as shown below, then click on Run Screener to see your results.
*Please Note: Disregard the Strategies tab; that’s an exclusive for Team TradeSmith.
When I ran the screen yesterday, I got 128 results – including some recognizable stocks such as Newmont (NEM), Zoom Communications (ZM), and Ralph Lauren (RL) among many others. Below is a screenshot of the top 10 results.
You can also consider adding more filters of your own choosing by simply clicking on + Add Filter to choose from dozens of filters to help you narrow your search results.
And don’t forget to click the Save button (next to Run Screener) to save your screener and filters for future reference.
Mike Burnick’s Bottom Line: Although it hasn’t shown up in the official data just yet, tariffs could easily lead to increased inflation – putting stocks under cost pressure. One way to help protect your portfolio is by focusing on stocks that are inflation resilient: quality stocks with pricing power and high free cash flow.
Good investing,
Mike Burnick
P.S. Over the last few months, Inside TradeSmith has focused on helping you stay ahead of rising inflation pressures and market turbulence – especially as tariffs threaten to reaccelerate costs across the economy.
We’ve explored how inflation-resilient stocks, strong free cash flow, and quality fundamentals can help defend your portfolio during uncertain times.
But that’s only one way to navigate today’s market.
Elsewhere in the TradeSmith ecosystem, Jeff Clark – a veteran trader with more than 40 years of experience – has taken a more aggressive approach. And if you joined us yesterday, you saw firsthand why.
Jeff unveiled what he calls the best trading setup of his career, powered by a new TradeSmith-built screener designed to help traders capitalize on market volatility, not just survive it.
This system has been backtested to deliver gains like 332% in 14 days from Amazon.com Inc. (AMZN), 636% in seven days from Tesla (TSLA), and 469% in 21 days from Google (GOOGL).
If you missed it, there’s still time to catch the replay. Click here to see The Countdown to Chaos before it’s taken down.