Trying to look through thick fog to see corporate earnings growth, inflation rate

Miami Herald (FL)

Visibility is one of those jargony words reserved for pilots, meteorologists and business leaders. And there has been very little visibility for business.

High gas prices, a tight job market, Russia’s war in Ukraine, rising interest rates, an upcoming election and talk of a recession growing louder have clouded the ability of businesses to see clearly into their economic futures.

That vision will be tested this week as big companies begin reporting their latest quarterly financial results, and the latest inflation data is released before the next Federal Reserve interest-rate meeting later this month.

The June Consumer Price Index will continue to show inflation burning a hole in the budgets of consumers. Pump prices over $5 a gallon in parts of the United States and fast rising grocery prices everywhere will do that. The corrosive effect on household budgets is especially true for lower-income Americans. The capital markets expect the June inflation data to all but guarantee the Federal Reserve will hike borrowing costs by three-quarters of 1% for a second time, in late July.

Inflation will be a key theme to listen for during corporate quarterly conference calls when CEOs talk about financial results. Profits for the S&P 500 companies are expected to grow by 4%, the slowest since a post-COVID-19 vaccine world, according to market data firm FactSet. And the growth rate has been slowing as earnings season approaches, but not slowing more than normal. PepsiCo, JP Morgan, and Delta Air Lines are among the early round of companies reporting quarterly earnings this week.

Stock market bears argue profit forecasts, especially profit margins through the end of the year, are much too high. Companies experiencing inflation may be finding themselves limited to pushing those higher prices through to consumers and customers, as demand cools and supplies increase.

Company executives will be understandably cautious given the headwinds in the second half of this year: inflation; war; election; rising interest rates; and recession. This is when investors should look for visibility from companies in their stock portfolios.