Inflation is decreasing, but it’s early to judge if the bear market in stocks is over, Morgan Stanley strategists said on Monday, warning that firms will soon start to struggle from falling prices and high labor costs, dragging down profits.
That will be dilemmatic to investors, who have been optimistic about the stock market’s recent rally and believe that the falling inflation will push the market and the economy.
“The rally in stocks has been powerful and has many investors believing the bear market is over. However, we think it’s premature to sound the all-clear simply because inflation has peaked,” the bank’s strategists said, adding that falling inflation would drag on corporate profits in exactly the opposite way rising inflation boosted them.
“Just like most underestimated the positive effects of inflation on operating leverage, we think they are underestimating the negative effects from inflation falling,” the strategists said.
They pointed to July’s hot jobs report, which showed 528,000 jobs were added last month, which means that firms are still spending large amounts on their labor forces and will be saddled with those operating costs as the prices they charge to customers begin to fall.
