By now, it’s well understood that corporates took full advantage of the inflationary macro environment by opportunistically raising prices at a time when consumers were sitting on sizable excess cash buffers courtesy of fiscal transfers.

The C-suite recognized that when households are relatively flush and headline inflation is running 9%, no one will question the rationale for price increases, even if they might grouse.

In some cases, management discovered that pursuing a price-over-volume strategy to preserve margins led to a best possible outcome: Price and volume, as consumers not only absorbed higher input costs, but kept buying the same amount of goods and services.

When you throw in record-low debt costs thanks to an unprecedented terming-out opportunity in 2020 and 2021, it was a good time to be a corporation, as illustrated rather poignantly in the familiar figure above. (Not that there’s ever a bad time to be a corporation in America.)

For the better part of a year, bears argued the good times couldn’t possibly last. Inflation and flush consumers were a historic boon, but disinflation was just around the corner and cash buffers were dwindling rapidly.

The implied reckoning was pushed out time and again, but two prominent Wall Street equity strategists suspect the moment of truth is finally nigh.

“With large cap revenue growth approaching 0%, we remain focused on pricing power as we head into 2024,” Morgan Stanley’s Mike Wilson wrote Monday, flagging the “strong” relationship between topline growth and the PPI finished goods series, shown on the left, below.

This week’s PPI update will offer a fresh read on the situation, but for now, the outlook for sales growth among America’s largest corporates appears challenging.

In his year-ahead outlook, JPMorgan’s Dubravko Lakos-Bujas made the same general argument, and in even starker terms.

“After a period of record pricing power, the recent disinflationary trend should become a major headwind for corporate margins amidst sticky and lagging wage trends,” he said. “In fact, pricing power could outright turn negative / deflationary in some industries.”

That might sound like a good thing coming off the developed world’s exhausting, three-year battle with the most acute inflation impulse in four decades, but for the investor class (crocodile tears, I know), it could mean the end of margin expansion and thereby lackluster profit growth.

“In terms of the earnings growth profile next year, consensus expects a rebound in EPS growth driven by a return of margin expansion and company transcript mentions of ‘demand recovery’ appear to have stabilized which is encouraging,” Wilson wrote, before striking a characteristically cautious tone. “We also expect a rebound in EPS growth next year but are slightly less optimistic in terms of the magnitude of margin expansion, as we see earnings risk persisting in the near-term before a broader recovery takes hold as next year evolves.”

Lakos-Bujas seems far less sanguine than Wilson, which is saying something: Mike’s not exactly known for sunny market outlooks. “We expect lower sequential revenue growth, no margin expansion and lower buyback executions,” JPMorgan’s equity team said.

This is all set against a backdrop of declining household liquidity and excess savings, as illustrated below.

“Nearly all the inflation-adjusted excess cash sits with the relatively affluent (top 20%) while the middle-class (top 20%-60%) real liquidity is back to pre-COVID levels and the bottom 40% are worse off,” JPMorgan’s strategists said.

Suffice to say the bank doubts this’ll all resolve peaceably for an equity market that in many respects is priced to perfection — or priced for “a near perfect landing,” as Lakos-Bujas put it.

The way JPMorgan sees it (and Morgan Stanley’s Wilson generally agrees, although he expects the outlook to improve beginning late next year), the disinflation process is unlikely to play out without “a significant impact to demand and pricing power.”

That’s in no small part responsible for what counts as one of the lowest 2024 S&P forecasts on the Street. JPMorgan sees US corporate profit growth of between 2% and 3% next year, with aggregate, index-level EPS of just $225. Lakos-Bujas’s SPX target is 4,200 “with a downside bias,” as he put it.