Last week, it was about the surprise data for the June inflation! As it looks like, the data suggest that the FED is about on a winning track when it comes to beating inflation. Investors celebrated this, assuming that a soft landing becomes the next phase. However, there is a catch-22! Fast-falling inflation suggests that weaker earnings growth needs to be expected.
Let’s look at what happened.
Over the last few weeks, PE valuations have risen by about 10% as the inflation data confirmed the downtrend. Additionally, the market was overshadowed by the hype around artificial intelligence, where valuations spiraled quickly into unattractive valuations.
While we observe failing prices in areas such as consumer goods, commodities, hotel and airfare prices, and electric vehicles, where supply is outstripping demand, we consider that some, falling prices across multiple industry sectors will ultimately hurt earnings growth.
In fact, many investors believe that the economy is already engaged with the next expansion. But we think that is not happening so quickly and equity investors should be careful to what they look for; we believe that the market is on a slippery slope for earnings growth and hence stock valuations may now be quite extended.