19 July 2023
Deflation is becoming a growing concern for stocks, reminiscent of the challenges faced during the 2008 financial crisis, according to Morgan Stanley’s chief stock strategist, Mike Wilson. He warns that falling prices erode firms’ pricing power, leading to a negative impact on earnings and stock valuations. While easing consumer and producer prices have initially been interpreted as positive news for stocks, Wilson cautions that the shift from disinflation to deflation could pose a significant headwind. The effects of rate hikes take time to surface, and there is a possibility that prices may actually decline. This scenario is particularly worrisome as companies have relied on passing on higher costs to customers during a period of inflation. Signs of deflation are already emerging, including declining housing and car prices, as well as price drops in sectors such as airlines and hotels. Wilson emphasizes the need for caution among equity investors, as the current market conditions mirror the slippery slope experienced during the 2008 financial crisis, which resulted in a severe earnings recession. Morgan Stanley has previously projected a potential 16% decline in corporate earnings, highlighting the substantial risks that deflation poses to the stock market.