Markets have been celebrating disinflation, but it may be bad for stocks

While investors are celebrating signs suggesting U.S. inflation is slowing down, such a trend may negatively impact company earnings and in turn weigh on stock prices, as companies release their second-quarter financial results while the Dow Jones Industrial Average is on pace to record its 12th straight day of advance.

“Stock prices are a combination of a multiple and earnings, and while disinflation may be good for the former, it could be negative for the latter,” said Tom Essaye, president at the Sevens Report Research. It is important to watch commentary on pricing and consumer demand in the current earnings season, Essaye said. “Because as inflation falls, so will many companies’ margins and profits, and that’s not something that’s priced into stocks right now and provides some downside risk into earnings,” Essaye wrote.

CPI refers to the consumer price index, which is used to calculate cost of living adjustments while PPI stands for the producer price index, which is usually used to calculate real growth.

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