With inflation seeming to cool in some areas of the economy, the tailwind may have helped some businesses as many earnings reports from S&P 500 companies (^GSPC) has been positive.

Northern Trust CIO Katie Nixon joins Catalysts to discuss the recent market rallies focused on tech and how the market can continue to develop.

Nixon speaks on the ways cooling inflation has helped companies with their margins, affecting growth: "I do think pricing power has propelled, a lot of revenue growth, certainly for many companies in the S&P 500. And we actually see margins remaining pretty stable at around 12%, even after sort of this pricing power has waned a bit. So margins are expected to be strong."

She continues with: "We know that companies are being very, very careful about how they spend their money in order to really preserve margins in the absence of that really broad-based pricing power. But I will say, as inflation comes down, that will allow the Fed [Federal Reserve] to start easing policy. And I think that would be a nice tailwind for, again, the other 493 in the S&P 500."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Nicholas Jacobino

Video Transcript

We just saw a handful of big tech names, leading stocks higher in the first half of this year and into market all time highs at the close on Tuesday.

So can we expect the rally to broaden out more from here?

Joining me now to discuss, we got K Nixon Northern Trust, Chief Investment Officer Katie.

Thanks so much for being here with us.

Look, the big question is of course, whether or not we can keep relying on a handful of names to drive this market higher and higher, how does the macro environment play into that question?

To what extent does the fed and the macro environment particularly when we are starting to get in some of this data that's showing softening way on a market that is driven by just a handful of names?

Well, uh first, I will say that, you know, we are also in the soft landing camp and that's a really important underpinning for our thesis that the the market will broaden out as we get further and further into 2024.

And if you think about it there, it's logical that we've had the leadership that we've had.

If you look at last year's earnings.

Um, without the mag seven, earnings would have been steep deeply negative.

Um, they were responsible for more than 100% of the earnings growth.

And even, uh, that pulled forward into the first quarter where those stocks were responsible for more than 100% of the earnings growth.

But with a soft landing forecast for the economy, we do see a broadening out of fundamental strength beyond those mag seven stocks.

So it really comes down to the earnings growth converging as we get closer to the fourth quarter where both the mag seven as well as the other 493 are, are really forecast to be kind of right on top of each other in terms of contribution of earnings to to the overall market, where is the next sector where that natural broadening out might take place or be evident?

Well, you know, it's pretty broad actually, what we see in 2024 is nine of 11 sectors in, in the market are expected to uh to grow um to grow earnings and four or five of them are expected to grow double digits.

So I think it's a, it's a real broadening out and that's really healthy because we don't want to have the market.

So dependent on just a small handful of stocks in a very small handful of sectors that tend to be very highly correlated.

I also want to talk about the earnings broadening that you guys are are mentioning here because we are starting to see some signs of coolness.

Obviously, the services IM data coming in at the lowest level since the heart of the pandemic in May of 2020.

How does the softening of inflation impact the ability of companies to have pricing power and therefore their earnings?

And is that a story that has yet to play out and could be a potential head wind on earnings in the next couple of years even?

Well, you raise a really good point and I do think pricing power has propelled um a lot of revenue growth certainly um for, for many companies in the S and P 500.

And we do see we actually see margins remaining pretty stable at around 12%.

Um Even after sort of this pricing power has waned a bit.

So margins are, are, are expected to be strong.

And it's interesting because if you think about the first quarter earnings releases, what we heard from many companies was efficiency, operation efficiency.

So we know that companies are being very, very careful about how they spend their money in order to really preserve margins in the absence of that really broad based pricing power.

But I will say as inflation comes down, that will allow the fed to start easing policy.

And I think that would be a nice tailwind for again, the other 493 and the S and P 500.

What do you think of the theme of this earnings season might be that prevails?

I think it's going to be operational efficiency.

I think companies have been ahead of the curve here.

Um In, in thinking about the contours of the economy, I think companies are seeing gradually a weakening in top line growth, whether it's real or nominal.

Um you know, consumers are, are consuming less and they're willing to, they're not as willing to pay higher prices.

So that's really gonna press your top line.

So I think the theme is going to be operational efficiency and operational resiliency.

Katie.

Thank you so much for joining us.

We really appreciate it.

That was Katie Nixon Northern Trust's Chief Investment Officer.