Stagflation or Goldilocks? The investment clock is running backwards

As its name suggests, the Investment clock – a model showing key stages of the economic cycle and corresponding asset-class exposures – usually moves mechanically through a series of phases. From growth to inflation, then stagflation and weaker demand, which leads to a disinflationary slowdown before recovery paves the way for a resurgence of growth. The economic fallout from the US-Iran war should have progressed like clockwork: the oil-supply shock would stoke inflation, erode purchasing power and corporate margins, and leave central banks with less room to support activity. This logic made stagflation the natural macro narrative in March and April. 

But markets see a different story. Equity and credit remain resilient, earnings indicate solid demand and growth indicators have not collapsed. Meanwhile, labour-market pressure is cooling and inflation breadth has weakened. Either markets are complacent about the damage still to come, or the economy is not moving into the stagflation quadrant of the investment clock, as anticipated. In this issue of Simply put, we ask whether the investment clock may be ticking in reverse – from overheating growth back to Goldilocks rather than on to stagflation.

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How to read the investment clock

The regime research starts with a simple observation: neither the economy nor asset returns are generated by one stable distribution. Academic James Hamilton¹ formalised business-cycle shifts between latent states, while Andrew Ang and Geert Bekaert² and Massimo Guidolin and Allan Timmermann³ showed that expected returns, volatility and correlations can change jointly across regimes. The implication for portfolio construction is important: an allocation that appears diversified may be concentrated in one macro state because two different assets can hedge one another in one regime and move together in another.

An all-weather portfolio must navigate these regimes without having to forecast them, and the recent past has made that harder. The classic 50/50 equity-bond portfolio has struggled since 2020 because of rates risk, and even Harry Browne's permanent portfolio – seen as the archetype of all-weather investing, as it aims to balance the economic risk among assets – is now up for debate. For that reason, regime frequencies are an essential input into the portfolio construction of our All Roads strategies. In a recent piece⁴, we illustrate how regime-level information can be incorporated directly within a risk parity framework – the bread and butter of our All Roads strategies.

This research also warns against treating the investment clock as a mechanical calendar. What matters is not just the current quadrant, but the probability of moving to each possible destination and the return distribution conditional on that transition. The clock should therefore be read as a probabilistic map, not as a metronome. That distinction is particularly important today, because returning from overheating growth to a Goldilocks scenario, or a move into stagflation, imply radically different outcomes for equities, bonds and commodities.

Major economies today are too strong for stagflation

Figure 1 uses the monthly averages of our growth and inflation diffusion indices for the US, Switzerland, Europe and China based on our latest nowcasting signals. The vertical axis measures the share of data showing improving growth; the horizontal axis measures the share of data that indicates rising inflation. The two 50% thresholds divide the clock into its four familiar quadrants.

Since December 2025, the US has moved sharply to the left, with inflation breadth below 50% and growth breadth above 50% placing the economy in a Goldilocks scenario. Switzerland has also moved towards lower inflation and sits close to the boundary between expansion and Goldilocks. Europe has moved further into expansion as activity improves, although its productivity data is not yet sending a signal as strong as in the US. China remains the outlier, residing in the stagflation quadrant, with weaker growth breadth and elevated inflation breadth. In spite of this progression in inflation pressure, the absolute level of inflation in China remains low.

FIG 1. Investment clock based on monthly averages of growth and inflation diffusion indices (DIs), December 2025 and July 2026⁵

The global picture shows some heterogeneity, but it is not one of synchronised stagflation. The key movement for the US and Europe is their anti-clockwise turns. How often have such moves previously happened? 

Tock, tick: the investment clock can move anti-clockwise

Contrary to the clock, history shows that shifting from expansion to stagflation is only one of several possible paths. Figure 2 records the destination regimes from previous exits from expansion. Stagflation followed in 41% of cases and a disinflationary slowdown followed in 12%. However, the most frequent destination was a direct return to a Goldilocks scenario, which occurred in 47% of observations.

Ticking backwards, therefore, is neither unusual nor economically incoherent. Expansion can end through demand destruction, but it can also cease through improved supply. New investment can expand capacity; productivity can absorb wage growth; labour shortages can ease without mass unemployment and inflation can fall before final demand does. In that configuration, nominal growth contains more real output and less inflation. The clock tends to move left before it moves down.

This is also why the present signal remains conditional rather than definitive. A renewed rise in services inflation would push the economy back towards a textbook stagflation path. Conversely, continued productivity gains and softer wage-sensitive inflation would validate a backward rotation. The current data lean towards the second outcome, but this remains uncertain for now.

FIG 2. Historical regimes observed after exiting an expansion period⁶

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Why the type of growth can predict the clock’s next turn

The distinction is not just one of semantics. Figure 3 shows annualised asset-class performance after an expansion period, based on the regime that followed. When the economy moved from expansion into stagflation, the S&P 500 returned about -12% on an annualised basis. When it shifted back towards a Goldilocks scenario, equity performance exceeded 20%. The gap between the two paths is therefore greater than 30 percentage points. Government and corporate bonds performed best in a disinflationary slowdown, while commodities provided their clearest relative support in stagflation.

FIG 3. Annualised performance of asset classes after leaving an expansion period, conditional on the subsequent regime⁷

This historical pattern can help explain current price action. Equities and credit have behaved better than a stagflation diagnosis would suggest, but that does not mean markets are enjoying unrestricted valuation expansion. The marginal cost of capital has risen and continues to cap multiples. Strong earnings are doing more of the work than re-rating. That is consistent with an economy moving towards a better growth-inflation mix while discount rates remain restrictive.

Two macro triggers will now matter most. The first is productivity, because it determines whether growth signifies margin growth rather than renewed inflation; evidence of improving margins is currently stronger in the US than in Europe. The second is the cost of capital, because it determines how much investors will pay for those margins. A decline in financing costs would enable the improvement in fundamentals to become a multiple expansion. Until then, a backwards-moving clock is constructive for risk assets and less hostile to duration, but it remains an earnings-led rather than valuation-led Goldilocks scenario.

Simply put, the investment clock may be ticking backwards. The current scenario appears to be more like an expansion rotating towards a Goldilocks state than an economy entering stagflation.

Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises is designed to track the recent progression of macroeconomic factors driving the markets.

Our nowcasting indicators currently show:

• Our growth nowcaster has continued to strengthen, reaching the 50% threshold. The signal is now in a high and rising regime

• Our global inflation signals have declined across all regions. The nowcaster remains in a high but declining regime

• There has been no change in our global monetary policy indicator. The only notable move was in China, where the signal declined as prices data weakened. This was offset by an increase in the US signal.

World growth nowcaster: long-term (left) and recent evolution (right)

Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).