Falling inflation is bad for some stocks as it hurts margins, says Morgan Stanley.Inflation continues to cool off, withnumbers showing on Tuesday that prices rose 4% from the same time last year. That's down from 4.9% year-over-year in April, and well below the index's 9.1% peak in June 2022.
That may be good news in one sense for stocks, as it means the Federal Reserve can back off from its aggressively hawkish stance, decreasing the likelihood of a recession. The Fed indeedBut in another sense, the continuing decline of inflation may be a negative for many stocks. This is because businesses have a harder time passing along higher costs, according to a recent note from Morgan Stanley.
"Inflation tends to benefit stocks as it rises because it allows companies to take price," the bank's CIO and Chief US Equity Strategistsaid in a June 5 note."As inflation declines, it becomes problematic for margins as pricing power declines while input costs are realized at a lag and come from a period when prices were higher."
This in mind, the bank's analysts put together a list of stocks with the strongest pricing power — or the ability continue charging the same price no matter what the macroeconomic circumstances are. We've listed the 30 names below, along with the analysts' reasoning, in order of their market sector.