A slowdown could be on the horizon, and analysts are predicting more earnings cuts. Add in a possible spike in inflation, and that combination of factors could favor a certain class of stocks. Running inflation is at the heart of the US Federal Reserve’s hawkish tilt, Jefferies said in a July 29 research note. But the recent decline in commodity prices is bringing relief to the market on expectations of a peak in US consumer prices, the bank said. Jefferies says that peak inflation will favor one stock class: quality stocks. Quality companies are those with solid performance — strong balance sheets, modest debt and stable profitability. “Our examination of past periods of falling US inflation expectations suggests that it is time to focus on quality stocks that have declined relative to [price-to-earnings] base,” Jefferies analysts wrote. In addition, a “change in style is underway” after more than 18 months of a cycle that has favored value stocks, according to Jefferies. Value stocks have been a significant beneficiary of rising inflation, and it’s time to change Such stocks are said to be trading at discounted levels relative to their fundamentals such as earnings. stocks will be back in favor,” Jeffries added. In July, markets saw the first round of earnings cuts, led by the United States and Asia. Most major sectors now face cuts in consumer services, utilities and technology hardware, Jeffries said. “After performing strongly for over 18 months, we believe value will take a backseat amid slowing earnings and a challenging macro environment. Globally, we now favor quality stocks as recessionary risks take hold.” , the bank said. It raised the health and consumer sectors to overweight. Stock Screening Jefferies created a screen of quality stocks that investors can buy based on a list of metrics that include: High profitability — next two years return on equity and return on invested capital at more than 10% Reasonable valuations — 12 -monthly forward price/earnings ratio less than 25x Good cash flows – companies with positive free cash flow conversion Growth and revision – “comparatively better” FY 2022-2023 EPS CAGR (compound annual earnings growth rate of share) and earnings revisions over the past three months Apple, Visa, chip maker Broadcom, retailers Home Depot and Dollar appeared on the screen Global stocks included pharmaceutical firm Roche, carmaker Volvo, IT firm Fujitsu and chip maker TSMC.