Investors think Corporate America’s ability to crank up prices is over

I know it gets a bad rap, but post-Covid inflation was pretty darn good for corporate America. Corporations were able to ramp up prices almost at will, boosting profit margins to levels not seen since the post-WWII boom of the 1950s.

But that was then. Now, with inflation almost beaten back into line by the Federal Reserve’s high interest rates, investors, perhaps even more than the companies themselves, seem to think that pricing power has eroded.

Goldman Sachs equity strategist David Kostin recently spotlighted the fact that consumer discretionary stocks have gotten a pretty lackluster response from investors, analysts and the market.

In a client note published Monday, Kostin wrote that despite better-than-expected sales, margins and earnings, “investors are not rewarding Consumer Discretionary EPS beats,” adding that “investors are skeptical of the forward implications of these results.”

In other words, investors seem to think that with the economy, and inflation, seeming to slow rapidly, we’re heading back to a world where it’s harder companies to pull off some of the price and profit increases they’ve enjoyed since the pandemic, muting any celebration of Q2 results.

This makes sense. While earnings season has been pretty good so far, with roughly 80% of companies reporting better-than-expected results, consumer-facing companies — from McDonald’s to Starbucks to Pepsi — have consistently hammered home the idea that consumers are increasingly price-sensitive and looking for value, i.e. cheaper, items.

That’s a bummer as far as profits go. On the other hand, if inflation really does collapse, it could make the Fed more willing to cut rates further and faster that people expect, which could always add some pep to other more rate-sensitive parts of the market.