Inflation concerns feature prominently in corporate earnings calls

Dive brief:

  • During recent earnings conference calls, CFOs and their fellow executives of Standard & Poor’s 500 companies have discussed inflation more than at any time in at least a decade as they face a soaring consumer and producer prices, according to FactSet.
  • Consumer Staples, Materials and Industrials cited inflation more than other sectors in earnings calls from June 15 to September 14, FactSet said, noting that consumer prices and prices to production rose last month by 5.3% and 8.3%, respectively.
  • Meanwhile, FitchRatings raised its estimate of inflation this year to 4.4% from 4.1%, warn of supply bottlenecks have driven the cost of processed products to U.S. businesses at the fastest rate in 40 years.

Dive overview:

A surprisingly rapid rebound in demand this year has temporarily overtaken ‘COVID-constrained supply’ and fueled inflation, especially in durable goods, Federal Reserve Chairman Jerome Powell said at a central bank annual conference on Aug. 27.

The Fed preferred inflation measure – the price index of basic personal consumption expenditure – increased 3.6% in July compared to the previous year, well above the central bank’s 2% target.

Fed policymakers begin a two-day meeting on Tuesday after signaling in recent months that they may soon start cutting record accommodations by slashing monthly treasury bond and mortgage purchases by $ 120 billion.

Most attendees at the previous Fed meeting in July thought “if the economy goes largely as expected, it might be appropriate to start slowing down the pace of asset purchases this year,”“said Powell.

Yet before raising the benchmark interest rate to a record low, close to zero, the Fed has “a long way to go” towards its goal of full employment, he said.

In the meantime, even if the job market improves, inflation is likely to subside as demand and supply balance out, Powell said. By toughening its policy too soon, the Fed would curb hiring and slow economic growth.

CFOs in some industries, including those involving durable goods, do not share Powell’s confidence that price gains will gradually slow down.

For example, manufacturers of construction products face unusual disruption due to inflation and supply constraints, FitchRatings said.

“Supply chain challenges in the US building products and materials industry are taking longer than expected to normalize, limiting the ability of companies to take full advantage of strong end-market demand and increase their revenues. sales, ”said FitchRatings. “The disruption is causing production delays, which have been exacerbated by continued port congestion, putting pressure on sales volume and driving up raw materials and transportation costs. “

Supply chain disruptions have slowed the recovery and fueled inflation, FitchRatings said, prompting it to cut its forecast for U.S. gross domestic product growth this year to 4.1% from 4.4%.

Despite the headwinds, analysts and companies in the S&P 500 have raised their estimates of earnings growth and profit margins for this year from their June 30 forecast, FactSet said.

“Analysts and businesses have been much more bullish than normal in their estimate revisions and third quarter earnings outlook so far,” FactSet said. Analysts expect earnings to rise more than 20% in the fourth quarter compared to the same period in 2020.

Base effects are a reason for the optimism, FactSet said. “These above-average growth rates are due to a combination of higher profits for 2021 and an easier comparison with lower profits in 2020 due to the negative impact of COVID-19 across many industries, ”the company said.

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