Sky-high prices scare S&P 500 companies, where inflation reports hit a 10-year high in quarterly earnings calls

A trader is sitting in front of a computer screen on the floor of the New York Stock Exchange.
Inflation is the hot topic for markets.

  • The number of S&P 500 companies mentioning inflation in earnings calls rose to its highest level in 10 years in the Q3 season.
  • Inflation in the United States rose to its highest level in 31 years as the economy reopened and supply chains struggled to meet demand.
  • The data company FactSet said that the profit margin is expected to be lower for S&P 500 companies in the fourth quarter.

The number of S&P 500 companies mentioning inflation on their earnings calls rose to a 10-year high in the third quarter, new data has shown as executives worry about the impact of rising prices on their companies.

In the third-quarter earnings season so far, 285 companies have mentioned the term “inflation” during calls, according to financial data company FactSet. This is the highest number since 2010 – and there are still around 40 S&P 500 companies that have not yet reported.

Inflation in the US rose to 6.2% year-on-year in October, data showed on Wednesday, the highest level since 1990. The rise was mainly driven by sky-high energy prices, with food and used car prices also rising rapidly.

Prices have risen sharply in advanced economies as governments have lifted coronavirus restrictions and demand has risen. Supply chains have struggled to keep up, and energy prices have risen.

Concerns about inflation are, of course, stronger for companies that are focused on goods and commodities rather than providing services.

Just shy of the fact that 90% of companies in the materials sector cited inflation during earnings calls in the third quarter, FactSet’s data showed, followed by 88% of grocery companies and 86% of energy companies.

Only 30% of communications companies mentioned the term compared to 34% of information technology companies and 56% of healthcare companies.

Read more: A main strategist on Wall Street breaks down how the investment guide used to combat high inflation has completely changed since the last scary decades ago – and mentions 4 stocks in the digital realm that fit the bill

Worryingly, there are signs that inflation will erode corporate profits in the last three months of the year following solid earnings in the third quarter.

The estimated net profit margin for the S&P 500 in the fourth quarter is 11.8%, down from 12.9% in the third quarter.

Still, there are reasons to be cheerful. An average profit margin of 11.8% is still relatively strong, and investors have so far shrugged off the prelude to inflation to keep S&P 500 trading around record highs.

“A combination of weak consumer satisfaction and higher inflation somehow does not weigh on equities: US and European equities continue to break new records,” said Neil Wilson, chief market analyst at London-based trading platform Markets.com.

“Ultimately, the market remains fairly comfortable with fundamentals, as earnings growth has been better than expected, as companies generally appear to be able to maintain margins by passing on their higher costs to consumers.”

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