Inflation or Recession? CEOs Will Decide Next Month

Consumers might still be benefiting from inflation pressures abating, but the same is no longer true for corporations.

Categories that provided relief to companies’ bottom lines over the past year — freight and energy prices, key commodities such as lumber, and supply chains — have either normalized and are unlikely to provide further benefits, or are reversing and will start to squeeze profits again. Companies will inevitably act to protect their profit margins. Whether they respond by cutting costs or once again prioritizing price increases over unit sales will determine whether the bigger risk in the first half of 2024 is recession or inflation. Neither outcome will be good for stocks.

Until recently companies benefited from declining inflation pressures even as revenue growth subsided. This allowed them to remain more profitable than investors had expected at the start of the year. Oil prices fell substantially between June 2022 and June 2023. Freight prices plunged in 2022, with the tailwind from those declines continuing well into this year as companies renegotiated shipping contracts. As supply chains untangled, manufacturers were able to get the missing components they needed to produce goods, ship and receive goods faster, and carry less inventory — all at lower costs than the year before.

This helps explain why the corporate earnings picture has pleasantly surprised investors, and why profit margins even managed to grow a bit in the second quarter. Slowing inflation that benefited both companies and consumers helped power the stock market this year.

Unfortunately, that no longer appears to be the case.

The Squeeze is On