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Special Report
3 Stocks That Win If Inflation Surprises to the DownsideAuthored by Chris Markoch. Publication Date: 5/11/2026. 
Key Points
- Cooling inflation could revive Federal Reserve rate-cut expectations and boost housing-related stocks.
- D.R. Horton and Lennar are positioned to benefit from lower mortgage rates and improving housing demand.
- Home Depot could see stronger remodeling and home improvement activity if the housing market rebounds.
- Special Report: Elon’s “Hidden” Company
On May 12, the April reading of the Consumer Price Index (CPI) will be released. Polymarket predicts the number will most likely come in at 3.7% or 3.8%. That "more of the same" result would support the Federal Reserve leaving interest rates unchanged. With energy prices surging amid Middle East tensions, it would seem rate cuts are firmly off the table unless there is a downside surprise. Incoming Federal Reserve chair Kevin Warsh has aligned with a narrative that productivity gains from artificial intelligence (AI) will be a "significant deflationary force"—one that could offset energy-driven pressures and put rate cuts back on the table.
Homebuilder and housing-related stocks are hoping for that outcome. While much consumer attention focuses on the lower leg of the K-shaped economy, the housing market is closely tied to the upper leg, including retirees looking to trade down and first-time buyers, both squeezed by a lack of supply. Lower mortgage rates won't be an overnight fix. But if they are viewed as the first of several cuts over 18 to 24 months, they could give these stocks real momentum. Supporting the idea that markets are always forward-looking, several housing stocks are getting analyst price target upgrades. D.R. Horton Uses Volume to Outperform in a Tough Housing MarketTo continue the housing metaphor, D.R. Horton Inc. (NYSE: DHI) is the best house in a bad neighborhood. DHI is bucking the sector trend, up more than 20% over the last 12 months. It comes down to strategy. D.R. Horton is the largest U.S. homebuilder by volume. That’s largely due to its “pace over price” approach. The company offers incentives to keep inventory moving. It comes at the expense of margin, but in a high-rate market, volume is more important than price. Plus, the company has in-house mortgage and financial services divisions that allow it to fund rate buydowns directly. Investors should keep their short-term expectations in check. DHI has been range-bound over the last six months, and it’s only up about 1% in 2026 as of this writing. It’s also trading at about 14x earnings, which is higher than its historic average. But D.R. Horton is likely to get a significant bounce on a market resurgence. It also pays a safe dividend that has increased at an average annual rate of over 17% over the last three years. Lennar’s Asset-Light Strategy Will Be in Focus If Rates FallLennar Corp. (NYSE: LEN) represents the other side of homebuilder stocks. LEN is down 20% over the last 12 months and more than 15% in 2026. The appeal comes from the company’s ongoing pivot to an asset-light model. The company offloads land development to third-party entities to reduce balance sheet exposure. That was the part of the company's Q1 2026 earnings report that analysts liked. The problem was the forward guidance, which said mortgage rates would stay around 6.2% to 6.4%. That, along with other headwinds Lennar cited, is keeping institutional investors cool on the stock. Analysts have been lowering their price targets for LEN, but the consensus price target of $99.87 is 14% above the stock’s price as of this writing. And that may not fully capture the expected earnings growth of around 29%. LEN trades at around 12x earnings, which is a discount to the broader market but a premium to its historic average. Home Depot Is a Housing Recovery PlayHome Depot (NYSE: HD) is the valuation play of this group. At around 22x earnings, it’s trading at a discount to both the S&P 500 and its historic average. However, critics may say the stock looks cheap for a reason. Total sales and adjusted earnings per share were both down year over year in 2025. This reflects the fact that Home Depot’s business is adjacent to an active housing market. For a couple of years, the company benefited from a surge in remodeling. And a recent UBS survey showed that the home improvement market may be improving. That would confirm the broader narrative that the company’s results are fixable if it can get some assistance from the housing market. For now, analysts are trending bearish and lowering their price targets. Still, the consensus price target of $410.86 implies a move of over 30% in the next 12 months. Home Depot reports its Q1 2026 earnings on May 19. At that point, investors will be listening for the company’s forward guidance, which has been pointing to a potential recovery in the second half of 2026. |
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