Corporate profits

Is inflation finally biting into corporate profits?

Since inflation started exploding last year, America’s big corporations have found a simple way to keep making record profits: pass all those price hikes with their customers.

But the formula may be showing signs of reaching its limit, adding drama to the upcoming earnings season. CEOs are lining up to tell investors in the coming weeks how much their company has earned in the first three months of the year. They are widely expected to say that the growth of the S&P 500 will be the slowest since the end of 2020.

Analysts are forecasting a 4.7% increase in earnings per share from a year earlier, according to FactSet. If they’re right, it would be the first time S&P 500 earnings growth has been below double digits since the last three months of 2020, according to FactSet.

Consider Delta Air Lines, which next week will be one of the first companies to report results. At the start of the quarter, analysts were expecting a loss of 68 cents per share. As of March 31, analysts lowered their forecast to a larger loss of $1.36 per share, largely because soaring oil prices raised jet fuel costs. That’s despite Delta saying in mid-March that it would likely make more revenue in the quarter than it had previously anticipated.

Not only do companies’ costs continue to rise, but their customers may also begin to balk at paying the higher prices passed on to them. Consumer spending in the United States increased in March compared to February, for example, but this increase was entirely due to higher prices consumers paid for products and services. After factoring in that inflation, consumers reined in spending last month more than economists had expected.

A simple way to gauge the impact of inflation on earnings is to look at the profit margins that companies will release in the coming weeks. These show how much profit companies keep for every dollar of revenue. In this earnings season, analysts expect the profit margin of S&P 500 companies to fall to 12.1%, from 12.4% at the end of 2021 and 12.8% a year earlier.

Some companies actually profit directly from the high inflation sweeping the world, of course. Energy producers are expected to see the strongest revenue and profit growth for the quarter due to their surging oil and gas prices.