The specter of US stagflation is looming over global financial markets, forcing investors to urgently readjust their asset allocations to cope with the dual threats of slowing economic growth and elevated inflation amid tariff shocks. Stagflation, the economic "nightmare" characterized by stagnant growth accompanied by inflation, could potentially reshape the landscape of bonds, equities, foreign exchange, and safe-haven assets, requiring investors to maintain heightened vigilance.

Background of Stagflation Risks

A survey conducted in early August by BofA Global Research revealed that approximately 70% of global investors anticipate stagflation within the next 12 months, characterized by economic growth below trend levels while inflation remains above trend.

Recent data has intensified these concerns: The US Bureau of Labor Statistics (BLS) reported in July that non-farm payrolls added only 114,000 jobs, significantly below the expected 175,000, with unemployment rising to 4.3%, marking the highest level since 2021; core Consumer Price Index (CPI) increased 3.2% year-over-year, above the Federal Reserve's 2% target (BLS, August 14, 2025); Producer Price Index (PPI) unexpectedly surged, rising 2.8% year-over-year in July (BLS, August 13, 2025).

However, global equity markets remain near historical highs, with the S&P 500 index touching 5,600 points in mid-August, while bond markets have also maintained stability, indicating that markets have yet to fully digest the stagflation threat. Marie-Anne Allier, fixed income manager at Carmignac Asset Management, warns: "Stagflation has become deeply embedded in market expectations, but prices have not yet reflected this imminent risk."

During the 1973-1974 US stagflation period, high inflation combined with economic recession caused the S&P 500 index to plummet nearly 40%, inflicting heavy losses on investors (S&P Global, August 1, 2025). Current market optimism may be underestimating similar risks.

Potential Bond Market Impact

The shadow of stagflation equally looms over bond markets, as persistent inflation could severely damage long-term bonds by eroding the real value of fixed interest payments.

Paul Eitelman, strategist at Russell Investments, notes growing concerns among pension funds and insurance companies about inflation's impact on bond portfolios. "If the US releases another weak employment report, stagflation panic could sweep through bond markets, triggering a sell-off," he warns.

Mayank Markanday, portfolio manager at Foresight Group, indicates that long-term bond yields across G7 economies are highly correlated, and if US Treasury yields surge, other G7 bond markets would likely be unable to escape unscathed. Currently, US 30-year Treasury yields have risen to 4.5%, while German and UK yields have reached 2.8% and 4.2% respectively (Trading Economics, August 15, 2025), demonstrating emerging selling pressure.

Should high inflation force the Federal Reserve to delay rate cuts, short-term bonds would also face pressure. The Fed's July meeting minutes showed policymakers' concerns about persistent above-target inflation, with 2025 rate cut expectations reduced from three to one. This has intensified downward pressure on short-term bonds, with 2-year Treasury yields falling to 3.8%.

Global Stock Market Potential Risks

From bond markets to equities, stagflation threats are omnipresent, potentially triggering severe global market volatility.

Michael Metcalfe, head of macro strategy at State Street, points out that since 1990, when US manufacturing activity showed "economic contraction" combined with "prices above average," the MSCI World Index has declined an average of 15%. The S&P Global July manufacturing PMI was 46.8, remaining below 50 (the expansion threshold) for three consecutive months, while the input prices index rose to 58.2, reaching its highest level since 2023, further confirming stagflation signals.

Kristina Hooper, chief market strategist at Man Group, states that markets are currently "selectively optimistic," tending to ignore negative factors while focusing on positives, "like parents only seeing the best in their children."

Caroline Shaw, multi-asset manager at Fidelity International, anticipates US economic growth deceleration with stagflation as her core scenario. While she remains optimistic about technology stocks, she purchased put options on the Russell 2000 small-cap index in mid-July to hedge against cyclical stock risks.

The Nasdaq index has gained 18% in 2025, but Goldman Sachs warns that small-cap stocks are more sensitive to economic cycles and could bear the brunt of impact. Emerging markets are also affected, with China impacted by slowing US demand, and the CSI 300 index showing only a 3% gain in 2025.

US Dollar Weakening Pressure

Stagflation poses a dual threat to the US dollar: weak economic growth leads to currency depreciation, while persistent inflation erodes purchasing power.

Nabil Milali, multi-asset manager at Edmond de Rothschild Asset Management, expects the dollar to weaken further against the euro.

Since 2025, the euro has appreciated over 12% against the dollar, breaking above 1.25 in the third week of August, reaching its highest level since 2023; the yen and pound have also performed strongly, with the yen appreciating approximately 8% against the dollar, driven by Bank of Japan rate hike expectations, reflecting market confidence erosion in the dollar.

Bank for International Settlements (BIS) data shows the dollar's real effective exchange rate declined 3.7% in Q2 2025, marking the largest quarterly decline since 2022. Hedge funds have increased long positions in euros and yen due to diminished Fed easing expectations, further pressuring the dollar.

Investment Opportunities in Anti-Inflation Assets

In a stagflation environment, anti-inflation assets become preferred safe havens.

Man Group's Hooper points out that gold, as a traditional safe-haven asset, has become more attractive, with global gold ETFs experiencing inflows of 230 tons in the first half of 2025, the largest increase since 2020.

Foresight Group's Markanday recommends investing in short-term Treasury Inflation-Protected Securities (TIPS), bonds whose principal and interest adjust dynamically with CPI, with current 5-year TIPS yields reaching 1.9%.

Russell Investments' Eitelman notes that professional investors are turning to inflation swaps, financial derivatives that appreciate with rising inflation, with trading volumes increasing 25% in Q2 2025 (Barclays Research).

Additionally, Real Estate Investment Trusts (REITs) are attractive as rental income is linked to inflation, with the REITs index gaining 8% in 2025 (JPMorgan Asset Management); commodities such as crude oil also possess anti-inflation potential due to supply-demand tensions, with Brent crude prices rising to $85 per barrel in 2025.

Market Outlook

Despite intensifying stagflation risks, markets have not yet panicked. State Street's Metcalfe believes investors underestimate the impact of global trade disruptions, partly due to optimistic expectations regarding technology company profitability. However, stagflation could trigger severe market adjustments, similar to the global financial turmoil of the 1970s.

The International Monetary Fund (IMF) has downgraded its 2025 US GDP growth forecast to 1.7%, below 2024's 2.5%, warning that stagflation risks are intensifying global uncertainty.

For the current environment, investors may adopt the following strategies: prioritize allocations to gold, TIPS, and REITs while reducing cyclical stock exposure; use foreign exchange hedging tools to mitigate dollar depreciation risks; construct diversified portfolios focusing on emerging market bonds and energy assets to effectively respond to stagflation impacts.