For all the talk of wage inflation and supply chain snarls, S&P 500 profit margins keep rising, reaching 15% during third quarter earnings season.
The doom and gloom predictions that hyperinflation will hit the U.S. has at least one glaring flaw: it seems to take no account of the two-decade trend of higher worker productivity and technological breakthroughs that have helped deliver low inflationary readings.
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Third quarter corporate earnings reports throw a wrench in the hyperinflation viewpoint. Companies may be complaining about rising costs, but the numbers say they’re successfully managing through it, suggesting that productivity and technology are a potent combination that’s offsetting higher prices for raw materials, shipping or wages.
The operating profit margin for the S&P 500, and a subset of the index that excludes the financial sector, climbed to multi-year highs this week.
Granted, some companies are passing along higher costs to their customers by raising prices, which helps their margins. But remember that corporate costs go up first, then they raise prices. That timeline would suggest margins would need to shrink before the benefit of price hikes kick in. The margin data indicates that there’s no evidence that profitability is being affected.
Productivity is, in our view, an essential aspect of the economic and inflationary future.
In Horizon Investments’ 2022 outlook on inflation, we wrote that the dueling views of inflation rest on the question of whether productivity would be powerful enough to tame rising prices. And we showed that the current increase in productivity far exceeds what was seen during the stagflationary 1970s. While a definitive answer remains months away, third quarter earnings data suggest that the “transitory” view of high inflation is still likely the correct one.
The vocal debate over inflation that’s playing out on TV and in the press (see the response by Ark Investment’s Cathy Wood to Twitter CEO Jack Dorsey) is an example of the noise that goals-based investors may want to consider disregarding if inflation is an issue that’s going to cause them to make rash financial decisions.
The macroeconomic forces at play that influence inflation can be both diffuse and hard to predict. What’s more, trends can rapidly change, as we’ve seen with the plunge in lumber prices. In our experience, bold pronouncements are usually not helpful in guiding goals-based investors. At Horizon, we remain committed to being flexible and adaptable in managing money amid the unprecedented times we are living in.
Read Horizon Investments’ Q3 Focus Report: 2022 Outlook, The Next “Unprecedented” Year
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Originally published by Horizon Investments
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