Corporate profits

Corporate profits are high despite inflation and shortages

  • A FactSet report found that S&P 500 companies are on track to achieve near-record profit margins.
  • Corporate profits have been skyrocketing since the start of the pandemic, and margins are getting bigger and bigger.
  • That’s not what you’d expect from skyrocketing inflation, which means inflation might be less of a problem than widely reported.

If investors feared inflation, supply chain and labor shortages would eat into corporate earnings as the economy continues to recover, they have been wrong so far.

A new report from financial data firm FactSetunderlined by financial journalist Sam Ro in his newsletter TKer Substackfound that S&P 500 companies are on track to post profit margins of 12.9% in the third quarter of this year, based on previously released results and estimated forecasts for companies that have not yet communicated.

FactSet noted that this is the second highest net profit margin in the index, after only the record 13.1% margins posted in the second quarter of this year.

This is not what you would expect to see in an inflationary environment. Rising costs are expected to significantly reduce profit margins – higher bills for materials and labor are expected to eat into the bottom line. But despite supply shortages and rising wages, pandemic-era corporate America is still doing just fine — one way or another.

Federal government data also shows U.S. companies are enjoying a streak of record profits amid the pandemic and recovery. After a decline during the initial phase of the pandemic in the first half of 2020, pre-tax profits more than rebounded and exceeded $3 trillion in the second quarter of 2021.

These record profits came as a bit of a surprise, as the companies far exceeded Wall Street’s profitability expectations. FactSet noted that 81% of companies that reported earnings for the third quarter so far posted earnings per share above analysts’ estimates, tied for the fourth-highest share in the data company’s records. dating back to 2008.

Senior executives have been well aware of their “pricing power” during this period of inflation, and if you pay enough attention, they let slip how good this period is for profit making. CEOs and CFOs of companies ranging from PepsiCo to McCormick Spice have openly announced likely price increases for the rest of this year, bolstering revenue even as costs rise.

“We’ve been very comfortable with our ability to pass on the increases we’ve seen at this point,” Kroger chief financial officer Gary Millerchip said in October, one of several executives to brag about everything. what they could do. price in 2021.

Surprisingly resilient earnings for US companies come against a broader economic backdrop that should in theory provide stronger headwinds. Overall economic growth in the third quarter was well below economists’ expectations, with US GDP growing just 2.0% on an annualized basis, a fairly marked slowdown from 6.7% growth in the second quarter. trimester.

The last few months have also been marked by inflation and shortages of all kinds in the supply chain. Prices for producers have skyrocketed, with the Bureau of Labor Statistics Producer Price Index up 8.6% year on year in October. Shortage of components like semiconductor chips have plagued manufacturers all year, and West Coast ports are seeing unprecedented backups as the holiday season approaches.

Employers also face labor shortages, as millions of workers quit their jobs each month in search of higher wages and better working conditions. In response, companies have raised wages, especially in traditionally lower-paying sectors like restaurants and hotels.

Despite all of these factors that should weigh on profit margins, Corporate America continues to be strong.