In 2024, inflation, interest rates, and the presidential election will likely be on top of ETF investors’ minds. Here are four other lesser-known trends and insights — both positive and negative — to consider in 2024.
1. Pricing power is needed to withstand short-term periods of weaker demand
It is not necessarily difficult to predict certain demand trends or themes that affect broader sector and industry revenue growth. A larger issue, however, has been balancing realistic and sustainable revenue growth and profitability with analyst and investor expectations. Analysts like to see growth. And higher revenue growth equals higher multiples equals higher stock prices.
But when companies like Netflix (NFLX) and Tesla (TSLA) already have a large share of their respective markets, that growth rate eventually tapers off even in good markets. From there, they can raise prices — which Netflix has done several times over the past few years — to sustain a high level of revenue growth. This is referred to as pricing power. That means essentially raising prices while maintaining (or growing) demand. Companies with pricing power can increase revenue while demand moderates. They can also increase margins by passing on higher inflationary costs to customers. This becomes more important in our current environment, with higher inflationary costs on top of several years of consistently strong revenue growth.
Looking more broadly than the “Magnificent Seven” stocks, we’ll see companies with stronger pricing power in the consumer discretionary and consumer staples sectors. Companies with stronger pricing power typically sell goods and services that are difficult to replace; for example, staples products such as Coca-Cola (KO) or Costco (COST) or brand name products like Nike (NKE) and LVMH Moet Hennessy (MC FP) on the discretionary side.
These companies typically exhibit higher growth and stronger quality characteristics. And can withstand fluctuations in demand. ETFs that could benefit from this include consumer staples ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) and luxury goods ETFs like the Tema Luxury ETF (LUX). (Bonus: There is an ETF that captures companies with strong pricing power. It’s the Invesco Bloomberg Pricing Power ETF (POWA).)