Federal Reserve Chair Jerome Powell sent equity markets higher last week with a subtle but important shift in tone. In his remarks, Powell signaled easier monetary conditions ahead and, more significantly, the Fed walked back its ill-fated 2020 policy “framework” that tolerated higher inflation.
That experiment called “flexible average inflation targeting” was intended to balance past undershoots of the Fed’s 2% inflation goal. Instead, it coincided with pandemic stimulus, supply chain shocks, and soaring demand, producing the worst bout of inflation since the 1970s. At its peak in June 2022, consumer prices were rising at 9.1%.
Now the Fed is returning to its more traditional stance: flexible but committed to keeping inflation anchored around 2%. The pivot is not just technocratic fine print it reshapes the environment for investors deciding how to protect and grow wealth in a world of shifting policy, uncertain growth, and still-present inflation risks.
And here lies the central paradox: while Fed decisions influence short-term interest rates and bond yields, history shows that equities ownership in real businesses have consistently been the most resilient asset class in inflationary and post-inflationary cycles. If you want to beat inflation, you need to own things that grow faster than inflation. That means stocks.
Below are seven principles that explain why.
1. Stocks Represent Real Assets That Grow With the Economy
Unlike bonds, which pay fixed coupons eroded by inflation, stocks represent claims on companies with pricing power, tangible assets, and the ability to adjust. Firms raise prices, increase productivity, and expand into new markets.
Look no further than the S&P 500 chart versus New York Times front-page headlines: even amid tariff battles, political turmoil, and Fed chatter, stocks marched higher. The lesson is simple: money isn’t made on the front page, it’s made by owning real businesses that compound value behind the headlines.
2. Dividends Compound and Outpace Inflation
Reinvestment of dividends has historically accounted for the majority of equity market returns. In inflationary periods, strong companies tend to boost dividends to keep pace with rising earnings.
The S&P’s 10 largest dividend payers today span sectors from financials to energy and illustrate the built-in inflation adjustment of equities. Bonds can’t raise coupons; stocks can raise dividends, often faster than inflation.
3. Innovation Is the Ultimate Inflation Hedge
Inflation reflects money losing value. Innovation reflects society creating new value. From railroads to semiconductors to artificial intelligence, the U.S. stock market has rewarded investors who align with companies driving productivity forward.
The data is striking: Nvidia (NVDA) has delivered a 31,480% return in the last decade alone, while Microsoft, Apple, and Amazon continue to reinvent themselves. The biggest winners can come from anywhere. What is the common denominator of Monster Beverage, Deckers Outdoor, Tractor Supply? Innovation that beats inflation by creating entirely new categories of value.
4. Stocks Outperform Bonds Across Inflation Cycles
The academic evidence is overwhelming: over long periods, equities deliver positive real (inflation-adjusted) returns, while bonds often fail to keep up.
Take the Fed’s last great inflation fight in the 1970s. Bonds delivered negative real returns, while equities, though volatile, ultimately rewarded long-term investors. More recently, the S&P 500’s equal-weight return since 1999 outpaced most of the decade’s “blue chips.” The lesson: bonds are ballast, but equities are the engine.
5. Globalization and Market Breadth Favor Equity Investors
Today’s investors aren’t confined to U.S. companies. They can own world-class businesses across developed and emerging markets. Multinationals often operate in dozens of countries, giving them natural hedges against inflation in any single economy.
And crucially, leadership shifts. Some of the top 10 companies of 2000 were GE, Cisco, and Intel, but all have mostly lagged the index in the decades that followed. Only Microsoft and Walmart held up. Meanwhile, today’s top names such as Apple, Amazon, and Nvidia have emerged from outside the spotlight. Today’s leaders are unlikely to be tomorrow’s. That’s good news for investors willing to look beyond the obvious.
6. Stocks Convert Inflation Into Growth
Inflation penalizes savers, but it can accelerate revenue growth for companies with strong brands, cost discipline, or control of scarce resources. Consumer giants pass on higher prices. Energy producers benefit from commodity cycles. Healthcare innovators raise pricing power with each breakthrough.
Even if nine out of ten “longshot” stock bets fail, the one winner can carry a portfolio. In a basket of 10 speculative names, nine could fall 90%, but one rallying 1,000% would still produce a positive return. Inflation hurts many but it rewards the scarce few who can adapt, and those are precisely the firms that dominate stock returns.
7. Time Horizon Is the Ultimate Edge
The Fed’s pivot may change quarterly forecasts, but investors with a 10- or 20-year horizon operate on a different plane. Over any rolling 20-year period in U.S. history, equities have delivered positive real returns, regardless of inflation or monetary cycles.
The catch? You need the stomach for volatility. The best-performing stocks of the last 25 years are Nvidia, Amazon, Apple which spent long stretches down 50% or more from prior highs. Nvidia itself has been in a 50% drawdown 43% of all trading days in the past 25 years. The courage to stay invested separates those who enjoy compounding from those who sell at the worst time.
The Fed’s Lesson: Frameworks Matter, But Ownership Wins
Powell’s reversal of the 2020 “average inflation targeting” experiment is a reminder that even central banks armed with PhDs and data sometimes adopt frameworks that don’t hold up in practice. For investors, the lesson is humility: don’t bet your future on monetary engineering. Instead, bet on the enduring ability of human ingenuity, enterprise, and markets to create value over time.
Bonds can offer ballast, cash can provide optionality, and alternatives like real estate or commodities can hedge. But the core of any inflation-resistant portfolio remains equities.
The Fed will continue to revise its frameworks. Investors should not. The principle is timeless: own businesses, stay invested, reinvest cash flows, and let compounding do the work. Inflation is an adversary, but stocks remain the proven defense.