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Slowing Inflation Isn’t Good for All Stocks. The Challenge That Tesla and Others Could Be Facing.

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Inflation may have peaked, which could be bad news for stocks that have benefited from higher prices.

It has taken time, but the market has finally coalesced around the idea that inflation won’t get hotter and could eventually fall back to a level more acceptable to the Fed. Friday’s strong payrolls data complicate the matter—wage growth is still rising at a 5% clip—but doesn’t change the fact that after peaking at 9% in June, the consumer price index slipped to 7.8% in October and is expected to fall to 7.3% in November. That reading is due Dec. 13, one day before the Fed announces its next monetary-policy decision.

Financial markets are already starting to reflect this slowdown in inflation and less-aggressive rate hikes. The two-year Treasury yield, which most closely follows the course of short-term interest rates, is down 0.448 percentage points from its 52-week high of 4.726% on Nov. 7, even after jumping 0.024 points on Friday. Now, chances for another three-quarter-point rate hike at the Fed’s December meeting have fallen to 25%, from 40% a month ago, despite the strong jobs number.

The stock market loves the idea of slowing inflation. The
S&P 500
has gained 9.8% over the past month, as investors position for a gentler Fed. That makes sense. Stock valuations fall as rates move higher, reflecting the higher cost of capital as well as better opportunities investors have in bonds relative to stocks.

But lower inflation isn’t good for all companies. Dennis DeBusschere, chief market strategist at 22V Research, notes that many companies—even those with little pricing power—have been able to pass on higher costs, which has allowed them to beat earnings this year. Some have even been able to boost gross margins above prepandemic levels and grow sales faster than the CPI. These companies, though, won’t get a price boost if inflation continues to slow. “Earnings beats have been [rewarded] much more than normal recently, and the misses punished significantly more as well,” he writes. “Companies that have ‘overearned’ remain our favorite short ideas for next year.”

DeBusschere screened for companies that have higher margins over the past year versus 2018-19 and median sales growth higher than core CPI, to find those that may be overearning. It includes some companies that have gotten hit hard recently—
Walt Disney
(DIS), and
Micron Technology
(MU)—but also some that have done relatively well. They include
CF Industries
(CF), steel maker Nucor (NUE), Raymond James Financial (RJF), ON Semiconductor (ON), and
American International Group

Raymond James might not be a short, but future gains could be harder to come by. UBS analyst Brennan Hawken recently initiated the stock at Neutral, arguing that a combination of “diminishing rate tailwinds, a prolonged slowdown in capital markets activity, and depressed asset levels could hinder the firm’s earnings trajectory.” While the stock has gained 18% in 2022, Hawken has a $127 target on the shares, up just 6.7% from a recent $119.08.

Write to Ben Levisohn at


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