Have Investors Priced Stocks To Perfection?

Summer brought another sizzling stock market, inspired by steady economic growth, consumer inflation, and corporate earnings. The scenario could be defined as Goldilocks, not too hot or too cold, and at some point, something will change.

Chart of the Week

Inflation is on the rise, and corporations are shouldering a significant portion of the cost. Last week, we learned that producer prices rose 3.3% in July (2.5% was expected), and the core prices within it were up 3.7% (2.9% expected). We also learned that consumer prices are rising at 2.7% (see graphic), but not as fast as the producer prices.

This differs from 2021/2022 when excess cash led to high demand, which pushed up consumer prices. Our current situation has little to do with demand and is more likely the impact of tariff taxes. Corporations appear to be paying a big portion. That would explain why producer prices (PPI) are up more than consumer prices (CPI).

As consumers, we want to see corporations pay. As investors, we should like corporate profits. The status quo may mean lower corporate profits in the next 12 months. Why are corporations absorbing much of the higher expenses?

1. Corporations are feeling generous towards consumers (very unlikely).

2. Corporations fear negative publicity associated with higher inflation (partially true).

3. Corporations will eventually pass higher expenses on to consumers (just a matter of time).

4. Corporations see weak consumer demand and do not think they can raise prices (possibly).