Searches for the phrase "stagflation 2026" have skyrocketed more than 650% over the last three months, according to Google Trends. It's easy to understand why.
A stagnant economy plus high inflation are the two key ingredients for stagflation. The U.S. lost 92,000 jobs in February, a much worse report than expected. Prediction markets now rate the odds of a U.S. recession at 40%. Rising oil prices have stoked concerns about resurging inflation.
Stagflation fears appear to be back. However, investors don't have to be afraid. Some stocks can help you ride out the storm -- if it indeed comes.
Image source: Getty Images.
Profit from the primary source of stagflation
The primary source of stagflation in the 1970s was soaring oil prices. If stagflation returns, oil is likely to be the main culprit again. When oil prices rise, so do the prices of many products, as their manufacturing and transportation costs rise. This drives inflation higher.
Simultaneously, higher oil prices hit consumers squarely in their pocketbooks. As a result, many cut back on discretionary spending. This contributes to the "stag" (short for "economic stagnation") part of stagflation.
ExxonMobil (XOM 0.29%), however, profits from the primary source of stagflation. It's the largest energy company by market cap that trades on U.S. stock exchanges. When oil and gas prices move higher, so do ExxonMobil's revenue, earnings, and share price.
NYSE: XOM
Key Data Points
We have seen this effect in recent months. ExxonMobil has ranked among the best-performing large-cap stocks year to date. It's one of the best natural hedges investors can buy if the U.S. economy enters a season of stagflation.
Defense is the new offense
You might say that defense is the new offense with a market characterized by economic stagnation and high inflation. Investors can make money by shifting to defensive stocks. Johnson & Johnson (JNJ +1.51%) and Walmart (WMT 0.93%) are two of the best picks, in my view. Both of these companies sell products that people need regardless of what happens with the economy.
NYSE: JNJ
Key Data Points
Johnson & Johnson is a healthcare giant with multiple blockbuster drugs in its innovative medicine segment lineup and a long list of market-leading medical devices in its medtech segment. Physicians won't discontinue prescribing potentially life-saving cancer therapies developed by J&J because the economy is struggling.
Walmart is the world's largest consumer staples company by market cap. Its stores and e-commerce platform sell must-have consumer products at low prices. Many shoppers could even switch from higher-priced retailers to Walmart during a period of stagflation to stretch their budgets further.
NASDAQ: WMT
Key Data Points
Johnson & Johnson and Walmart are both Dividend Kings, a group of stocks that have increased their dividends for at least 50 consecutive years. Membership in this elite group enhances the appeal of these two stocks to investors seeking stability. Income investors might not be thrilled with Walmart's forward dividend yield of 0.8%, but they'll probably like Johnson & Johnson's yield of 2.1% and ExxonMobil's yield of 2.6%.
Reaping déjà vu dividends
When stagflation reigned in the 1970s, ExxonMobil's share price soared. So did Walmart's (then much smaller company's) aggressive expansion strategy, which was a key factor behind its impressive gains. Johnson & Johnson didn't perform as well as the other two but held up better than most stocks.
I think that all three stocks would be winners if stagflation returns. But what if it doesn't? ExxonMobil, Johnson & Johnson, and Walmart should still be solid long-term picks.
None of these three companies is likely to deliver the gains seen in tech stocks over the past few years. However, their steady dividends combined with strong underlying businesses should enable them to deliver attractive total returns -- stagflation or no stagflation.
