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While U.S. stock-market investors have cheered cooling inflation, some have worried it could be bad news for equities — as disinflation may take away companies’ pricing power and hurt their future earnings.

But strategists at BofA Global Research suggest there is no statistical evidence to support the argument that disinflation could be a headwind to the financial health of American companies.

“Last week’s soft inflation data confirmed that we’re on the path to [a] Goldilocks [scenario] … but there are concerns that disinflation is a growing headwind to earnings, as earnings are nominal and higher inflation drives stronger earnings growth,” said Ohsung Kwon and Savita Subramanian, equity and quant strategists at BofA, in a Monday client note.

However, it’s demand and economic growth that drive corporate earnings rather than pricing — since pricing has simply been a lagging indicator with “no statistically significant relationship” to earnings, the strategists wrote.

While a company’s revenue has shown strong correlation to both the consumer-price index and producer-price index, both had “absolutely no correlation” to earnings growth, Kwon and Subramanian said.

Instead, real GDP growth has the highest correlation with the S&P 500’s SPX quarterly earnings growth when compared to other “macro variables” such as CPI, PPI or even nominal GDP, according to the BofA strategists.

Meanwhile, inflation has historically been a lagging indicator to corporate earnings, Kwon and Subramanian noted. They wrote that the correlation between S&P 500 earnings and inflation is lagged by the CPI and the PPI by five and three quarters, respectively.

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The seemingly unstoppable rally in U.S. stocks is facing a major test as more companies start reporting earnings this week.

While the so-called Magnificent Seven group of tech stocks may be getting most of the credit for driving the S&P 500 to ever-greater heights this year, the other 493 companies are expected to post their first year-over-year quarterly earnings growth since the fourth quarter of 2022, the BofA strategists said.

On the other hand, earnings growth is expected to slow for the Magnificent Seven for the second straight quarter, according to Kwon and Subramanian. “Given the high correlation between Big Tech’s outperformance in stocks versus earnings, we expect the narrowing growth differential to be the catalyst for the market to broaden out,” they wrote.

The strategists now expect the S&P 500’s earnings to grow 9% for the second quarter of 2024 with a 2% beat. A 2% beat would be in line with the historical average, but it would be the smallest quarterly earnings beat since the fourth quarter of 2022.

In addition, a cooling economy and earnings acceleration could be an ideal market setup for U.S. stocks, Kwon and Subramanian noted. “Historically, a slowing GDP and accelerating EPS [earnings-per-share] backdrop has been the best macro environment for stocks, resulting in a benign rate environment and strong fundamentals,” they said.

U.S. stocks finished higher on Monday afternoon, with the Dow Jones Industrial Average DJIA up 0.5% to end at a fresh record, while the S&P 500 rose 0.3% and the Nasdaq Composite COMP advanced 0.4%, according to FactSet data.