Powell Warns of More Inflation—Here’s Where Smart Money Is Moving

Key Points

• There's a rotation happening right now in these three ETFs, caused by the latest commentary from the FOMC meeting suggesting more inflation ahead.
• Institutional capital has already flown into these areas of the economy, making the bet as clear as day.
• Fundamentals and even price action line up to justify the view for these sectors to push higher.

Every quarter, investors get to reiterate their broader economic views by the people in charge of keeping the economy in check. For the United States, the federal open market committee (FOMC) meetings are one of the most important occurrences for investors and traders, both professionals and retailers alike. The reason is that the Federal Reserve (the Fed) chairman, Jerome Powell, shares his view on the economy and where the next steps may be.

The most recent meeting, taking place in the middle of March 2025, suggested that the Fed still sees the potential for higher inflation scenarios ahead, along with a slower economy overall. This is a stagflation scenario that has not been seen in over five decades, but it is still posing a risk, considering what the Fed chairman commented on in that meeting. This is an opportunity for investors to become students of history and markets in order to pick winning industries.

The last time this happened, or whenever the economy seems to have a sustained period of higher inflation, there are three areas that typically outperform. First is the energy sector, which investors can track and invest in through the Energy Select Sector SPDR Fund NYSEARCA: XLE, and then there is the industrial sector represented through the Industrial Select Sector SPDR Fund NYSEARCA: XLI. Finally, a connection to the basic materials sector can be made in the Materials Select Sector SPDR Fund NYSEARCA: XLB.

XLE ETF: A Diversified Way to Play the Oil Rally

There are plenty of reasons to consider oil right now, but investors must focus on two distinct aspects. First is the potential demand for oil that might result from more easing measures taken by the Fed if the economy falls into the sort of slowdowns that Chairman Powell called for in the last FOMC meeting.

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Easing measures to help the economy will likely create new demand for oil, as manufacturing activity could suddenly spike from its multi-year contraction as measured by the manufacturing PMI index today. The second aspect will come from inflation itself, as a weaker dollar will have a directly bullish impact on the price of oil.

Investors can note that oil prices increased by as much as 3% during the two days following the FOMC meeting, a clear sign that the markets are taking these commentaries as bullish for the industry. Checking in with specific stocks, there’s a reason why Wall Street sees a consensus upside of 65.2% in shares of Transocean Ltd. NYSE: RIG today, reiterating the energy sector view.

When comparing price action in commodities like gold, it’s clear oil has lagged—but that gap may soon close. The Energy Select Sector SPDR Fund reflects this trend and offers a diversified way to play oil’s potential upside. XLE holds many of the sector’s strongest names, providing exposure to both major and niche energy players. With supportive macro conditions, XLE could be one of the most efficient ways to capture energy sector momentum in the coming months.

XLI ETF Gains Traction as Investors Shift to Industrial Safety

Considering the S&P 500's recent volatility, which sent it lower by 10% from its highs, this index being in “correction” territory might trigger some capital to start flowing to safer, less volatile areas like the industrial sector. This trend could explain recent institutional interest in the Industrial Select Sector SPDR Fund. 

As of February 2025, this ETF saw a notable increase in institutional holdings, including a 12.8% boost from Ameriprise Financial. This boost brought the group’s net position to a high of $476.8 million today, or 2.5% ownership in the ETF, making it a sizeable bet on the direction that the industrial sector might take soon.

More than that, specific names stand out when it comes to price action and perceived safety, such as Caterpillar Inc. NYSE: CAT. The stock outperformed the broader S&P 500 sell-off by as much as 4% over the past month, signaling preferential treatment due to the broader industry’s tailwinds present today.

XLB ETF Sees Surge in Institutional Interest—What’s Fueling the Demand?

This is a bet that some institutions might already be getting behind. Defensiveness in markets and budgets might lead to increased infrastructure spending on the part of the government to boost business activity and employment, helping to recover the potential slowdowns that Chairman Powell suggested ahead.

Because of this, up to $955 million worth of institutional capital flew into the Materials Select Sector SPDR Fund, a buying spree led by Barclays. The bank decided to boost its holdings in the basic materials ETF by as much as 216.1% as of February 2025, netting its position at a high of $423.3 million today, or an 8% ownership rate.

Holding such a large stake in XLB signals a bold commitment. Still, if the volatility environments in the S&P 500 remain as elevated as they are today, then the flight to defensive areas like basic materials might be justified further.