Over the past week, the stock market is up by about 7% from its recent lows. From one perspective, not much has happened as the S&P 500 (SPY  ) is essentially back to pre-FOMC levels.

The major catalyst for this rally was the decline in food and energy prices. Recent inflation reports and leading indicators had been showing moderation in nearly every category except for this one. And at the FOMC meeting, Chair Jerome Powell had signaled that headline inflation would need to abate before the Fed would adjust its current course.

And, it's increasingly clear that the Federal Reserve's efforts are leading to a slowing in economic activity which is another indication of inflation peaking. As a result, it's fair to say that currently, the market is facing a situation of decreasing inflation risk but rising recession risk.

To be clear, this is a different dynamic than what has prevailed for much of 2022 when we had the inverse situation.

And, it could mean some relief for stock market investors. Rising inflation risk forced the Fed to ramp up hikes which mean multiple compression across the market even for stocks with earnings growth. This bearish force is likely neutered for the next few months.

Instead, we now have the risk of earnings declining due to the falling economy, but some stocks in certain sectors like healthcare (XLV  ), defense, utilities (XLU  ), and staples (XLP  ) will likely continue exhibiting earnings growth due to the nature of their businesses. These are the stocks that will outperform in this environment and provide the opportunity for positive returns.

In contrast, value, cyclical, material (XLB  ), and even energy (XLE  ) stocks are likely to underperform. One perspective on these growth cycles within bull or bear markets can be gleaned through the copper to gold ratio.

Obviously, when copper outperforms gold, investors are feeling buoyant about global growth prospects, while they are feeling gloomy when gold outperforms copper. Now, we are seeing gold outperform, implying that global growth is slowing.

The one antidote to this is for the Fed to start preemptively easing to offset the pain. Due to inflation, this clearly not an option. Therefore, we could be following the path of 2018 when the stock market started cascading lower until the Fed pivoted.