Falling inflation may prevent companies from exercising pricing power.US stocks continue to steadily rise as earningsCorporate profits are on pace to fall 9% through roughly a fifth of the Q2 earnings season, which is about 6 percentage points better than anticipated, according to Morgan Stanley. Strategists at the firm also pointed out that sales are tracking flat after beating by 2 percentage points so far.
"Many of the 1H tailwinds are likely to fade at a time when forward earnings estimates, and stocks, are expecting a rebound in growth," Wilson wrote in a July 24 note."So far, 2Q earnings do not broadly support the notion that such a rebound is coming."In fact, the firm found that earnings revisions decelerated in two thirds of industries in the weeks since early July.
"Disinflation is now eating into sales growth, which means investor focus is likely to shift toward top-line growers rather than just companies exhibiting cost efficiencies," Wilson wrote. He later added that"stagnant pricing power is met with lagged and elevated costs." "If we are right about pricing fading amid falling inflation, then sales will likely disappoint further from here," Wilson wrote. He also noted that lower demand is beginning to rear its head in certain sectors, especially those that are goods-oriented.As inflation falls, the pressure on companies to maintain the pricing power they've commanded while increasing earnings at the rate the market expects will only increase.
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