Markets Brief: Don’t Call It Stagflation

Heading into the new week, the Iran war continues to dominate the headlines, with oil prices pushing still higher as threats to infrastructure in the Middle East ramped up even further over the holiday weekend.

With energy prices already up sharply since start of the war, the uncertainty goes beyond just the trajectory for inflation but also for economic growth.

Higher Inflation, Slower Growth—But Not the 1970s

The prospect of higher inflation is increasingly being paired with expectations of slower economic growth. In a new forecast, Morningstar chief US economist Preston Caldwell notched up his expectations for 2026 inflation in response to the oil price jump. He now sees the Personal Consumption Expenditures Index (the Federal Reserve’s preferred inflation measure) coming in at 3.6% for 2026, up from the 2.6% forecast at the start of the year. (We will get a reading on PCE inflation for February Thursday.)

At the same time, Caldwell lowered his 2026 gross domestic product forecast to 2.1% from 2.2%. “We’ve reduced our near-term GDP growth forecasts, incorporating the impact of the Iran war on consumer spending and our updated projections for lower population growth, which will weigh on both consumption and residential investment,” Caldwell writes.

However, he pushes back on those who say the US economy is headed for a 1970s environment, widely called “stagflation.” He explains: “Comparisons to the 1970s are misplaced. Spending on petroleum products as a share of total personal consumption was around 3.3% in 2025, less than one-half of its 8.3% average in the 1970s.”

In addition, he expects inflation to trend down once the energy price spike has passed: “Meaningful slack in the labor market and broader economy should ensure inflation resumes converging to the Fed’s 2% target after the 2026 inflation spike.”

Against this backdrop, Caldwell sees the Fed keeping interest rates where they are for an extended period. However, he expects the next move to take rates lower. “We think the Fed will keep rates unchanged in 2026, before delivering a cumulative 1.25% in cuts over 2027-28.”

		Oil Contribution to PCE Inflation (%)

Source: Bureau of Economic Analysis, Energy Information Administration, International Energy Agency, Chicago Mercantile Exchange, Morningstar. Data as of March 31, 2026. Download CSV.

CPI Report on Deck

After a surprisingly strong jobs report released Friday while the markets were closed for the Good Friday holiday, the main economic event this week will be Friday’s release of the March Consumer Price Index. This will be the first government report where the impact of the Iran war is expected to be clearly seen through higher energy costs. At J.P. Morgan, economists are looking the CPI to jump to a 3.4% annual rate for March from 2.4% in February thanks to an 11% rise in the CPI’s energy component. But even excluding food and energy, the news isn’t great. J.P. Morgan is calling for the core rate of inflation to rise to 2.7% from 2.5%. And all this is even before the economy starts to see the second-order impact from higher transportation and fertilizer costs.

What’s Happening In the Markets This Week

War Impact Worsens an Already-Challenging Housing Market …

Much has been made of the housing affordability problem in the United States and the headwinds it is creating for the housing market. The recent rise in bond yields and the corresponding rise in mortgage rates are magnifying the problem.

“Geopolitical turmoil in recent weeks could weigh meaningfully on the broader economy, consumer sentiment, and the housing market,” writes Suryansh Sharma, director of industrials equity research at Morningstar. Mortgage rates have risen well above their late-February sub-6% level, he notes. Putting it all together, “we expect 2026 to be another challenging year for the US housing market.”

… But Opportunities May Exist in Homebuilding Stocks

While the backdrop may be challenging, Sharma highlights opportunities for long-term investors among housing stocks. “We still see a runway for greater household formation and homeownership rates among younger Americans, especially if mortgage rates ease,” he says.

Among the top stock picks are public homebuilder Lennar LEN and home improvement product manufacturer Masco MAS. Both trade in the 5-star range, as the soft housing market of 2026 has left them trading at large discounts.

Lennar stock is changing hands well below its Morningstar

fair value estimate

, with a price/fair value ratio of 0.57. Masco’s price/fair value ratio ended the week at 0.67. Lennar is the second-largest homebuilder in the US, and Sharma thinks its recent strategy shift toward capital efficiency will likely be a plus—its 2025 spinoff of a $6 billon land portfolio to Millrose Properties resulted in a balance sheet with increased liquidity. “We see material upside for Lennar’s stock in the long term,” Sharma writes. “In our view, Lennar’s current valuation doesn’t give it enough credit for its asset-light strategy shift.

Masco manufactures home improvement and building products. Sharma noted its sales have stalled as consumers spend less on repairs and remodels amid added tariff costs and the specter of a recession. In healthier economic conditions, Sharma says Masco is well-positioned to serve a growing repair and remodeling market as US housing stock ages and consumers increasingly accept smart home and energy-efficient products. “Once the US consumer gains confidence under more certain trade policy and healthy economic conditions, we forecast Masco will consistently deliver mid-single-digit percentage revenue growth and high-teens operating margin,” he writes.