The stock market is flashing a signal that inflation may be poised to spike

• Tom Essaye warns that rising energy and materials stocks signal potential 2026 inflation risk.
• Investors see sector surges and market rotation reminiscent of 2022.
• JPMorgan recently challenged expectations for rate cuts, forecasting a possible hike in 2027.

The stock market is flashing an inflation warning signal in the first few weeks of 2026 that could mean investors are in for an ugly year ahead.

That's according to Tom Essaye, the founder of Sevens Report Research, who warned in a note on Friday of a potential 2022-style rout for the traditional 60/40 portfolio.

Essaye pointed out that both energy and materials stocks are surging since the start of the year, rising by more than 9%. That far outpaces the S&P 500's gain of about 1%. Both sectors of the market can be leading indicators of inflation because prices for energy and materials trickle down to costs in other parts of the economy.

"Energy is obviously a critical input to inflation metrics as oil and gas prices impact every aspect of global trade, travel and logistics. Materials are a lesser discussed, but equally important factor affecting input costs, which inherently add upside pressure to inflation. And the strong YTD performance by these two sectors is not something to ignore as we continue through Q1."

He added: "Not many analysts have been discussing such a risk, but it is one to keep tabs on."

Inflation is relatively tame for now, with the Consumer Price Index hitting 2.7% year-over-year in December. That's above the Federal Reserve's target of 2%, but well off of highs seen in 2022, when spiraling prices sparked an aggressive cycle of Fed rate hikes and caused the S&P 500 to dive 25%.

But the strong materials and energy price action also comes alongside a broader shift from growth to value, and away from mega-cap stocks to small-caps and transportation stocks — warning signs that trouble could lie ahead, Essaye said. He highlighted the sudden outperformance in the S&P 500 equal-weight index, the Russell 2000 index, and the Vanguard Value Index.

"There has been a widely discussed rotation taking shape away from mega-cap tech, which led markets higher into late 2025, and to the 'rest of the market,'" Essaye wrote.

"Those early year money flows are a noteworthy concern, as they are reminiscent of the start to 2022, a year that proved to be one of the most painful for traditional '60/40' equity/bond investors in the last century," he continued. "This is a dynamic that could potentially be poised to repeat itself in 2026, and the YTD sector performance is adding to those concerns."

At the moment, markets widely expect inflation to remain relatively subdued in 2026, pricing in two Fed rate cuts.

At least one Wall Street bank — JPMorgan — has warned those expectations may be misplaced. The bank made waves earlier this month when it said it sees no rate cuts in 2026, and predicted that the Fed's next interest-rate adjustment would be a hike in 2027.