Core inflation is high and rising but we think it’s likely to recede which would help small-caps extend their outperformance. Perhaps more importantly, if inflation does recede, past tendencies argue that what has worked best this year so far, namely Semis, are among the most likely to underperform in the year’s back half. Rate sensitive industries tend to outperform when high inflation ebbs, most notably Health Care REITs, Air Freight & Logistics, Capital Markets, Office REITs, Textiles/Apparel/Luxury Goods, Trading Cos & Distributors, Ground Transportation and Retail REITs. Among the key larger industries, Banks tend to outperform if inflation is high but falling but underperform if it is high and rising. Biotech tends to underperform either way when inflation is high but fare much worse if it is high and rising. Among Capital Goods industries, Construction & Engineering, Machinery and Trading Cos & Distributors outperform when inflation is high regardless of whether it is rising or falling (though do better when it is rising); Commercial Services outperforms when inflation is high and rising yet underperforms when it is high but falling; Aerospace & Defense, Building Products, Electrical Equipment, Industrial Conglomerates underperform when inflation is high regardless of whether it is rising or falling (though all four but Building Products do worse if inflation is also rising).