Why the New Inflation Data Implies Fabulous Earnings Are Coming

The stock market is off to a sluggish start of 2024. And the latest inflation data released this past week did little to recharge the late 2023 bull rally in stocks. 

On Thursday, Jan. 11, we learned that consumer prices rose 3.4% year-over-year in December. That was hotter than expected and above the Fed’s 2% target. 

Then on Friday, Jan. 12, we learned that producer prices rose 1% year-over-year. That was softer than expected and below the Fed’s 2% target. 

Ultimately, these recent inflation reports painted a mixed picture about the state of inflation in the U.S. economy. 

But they painted an unequivocally bullish picture for earnings. 

Surprising Bullishness in Disappointing Inflation Data

To recap: Producer prices rose just 1% in December, but consumer prices rose 3.4%. Essentially, that means the input costs for businesses rose 1%, but their output prices rose 3.4%. 

That is a +2.4% delta between cost and revenue inflation. For the same product, revenues are rising more than 3X faster than costs. 

This was true throughout the last three months of 2023. In October, November and December, consumer price inflation consistently rose more than 3X faster than producer price inflation.

In other words, throughout the entire fourth quarter, companies consistently benefited from significant profit margin expansion thanks to price hikes that were far larger than any cost increases. 

And that means the upcoming earnings season should be quite good. 

The Final Word

The significant profit margin expansion businesses enjoyed in the fourth quarter of 2023 should soon be reflected in robust upcoming earnings reports.

And if it is, stocks should restart their bull run with a bang… 

…Which means now is a great time to be buying stocks. 

In fact, just yesterday, we executed our first new fundamental trades of the new year. And as of this writing, all of them are up, with several up more than 5% in just one trading day. 

So, which stocks are we buying right now?

Learn all about the stocks we think are in for a breakout 2024.

_{On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.}

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