| We believe the peak inflation narrative is true. Generally, economic growth (demand) is slowing, certain supply side issues are improving, and inventories have ballooned. In our opinion, this is a good thing. As stated by Piper Sandler, “The now-obvious inflation slowdown is a clear positive — reducing the odds of a 1960s/1970s engrained inflation outcome, forestalling a super-aggressive Fed tightening cycle, and likely putting the bond yield peak behind us. Even better, sharply slowing inflation will reduce the severity of the impending economic slowdown/recession. All good news.” Now, the bad news in our opinion. As discussed in a previous Two the Point, although revenue numbers looked strong this quarter, much of that strength has been predicated upon a company’s ability to raise prices as actual unit demand falls. As inflation eases, we think companies may find it difficult to continue to offset falling unit demand with higher prices…especially if unemployment begins to rise as economic growth slows. The chart below shows the historical correlation between corporate revenues and inflation. If history proves accurate, peak inflation may also coincide with peak revenue – a challenge to corporate earnings and the stock market over the next few quarters. |
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