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Inflation hasn't dented earnings forecasts

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This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Monday, June 21, 2021

Companies talking about inflation hits an 11-year high.

A single word defines the economic and market conversation right now: inflation

And corporate management teams, speaking to analysts during first quarter earnings season, were no exception.

In FactSet's latest weekly earnings insight piece published Thursday, John Butters looked at the prevalence of mentions about inflation on quarterly earnings calls. More importantly, he looked at how much forecasts have changed as a result of this concern. 

And while there is no doubt executives are talking about inflation, so far there's been little change in how the Street thinks results will be impacted. 

Butters and his team screened every earnings call held by an S&P 500 member from March 15 to June 15 and found 197 mentions of "inflation," the most since at least 2010. 

"The previous record was 163, which occurred in Q2 2018," Butters noted. "In addition, the first quarter marked the largest year-over-year increase (+138) in the number of S&P 500 companies citing 'inflation' on quarterly earnings calls going back to at least 2010 as well."

As a percentage of constituents, no sector within the benchmark index cited inflation more often than consumer staples, where 84% of members discussed price pressures during their calls. 

But Butters and his team find that expectations for this group are still tracking higher along with the broader market, indicating that analysts are not judging consumer brands more harshly for their exposure to inflation trends. 

For 2021, Wall Street expects earnings for the sector to rise 7.2% with margins coming in at 6.8%. In March, the Street expected earnings would grow 5.2% and margins would come in 6.7%. The prospects for earnings for this sector, in other words, have improved over the last three months — even as inflation pressures have become more prominent. 

These revisions are also in keeping with the overall market, as earnings growth and margin expectations for the S&P 500 at large have been revised up since March, according to FactSet's data. 

Margins for most companies in this sector — which is comprised mostly of food and beverage distributors or retailers — are already trim, and organic top-line growth is generally capped by how fast the overall economy is expanding. 

These companies, then, are most preoccupied with not only higher costs but costs that rise quickly — because their path to earning profits is already narrower than businesses in faster growing sectors like technology. 

As for what's driving these higher costs, shipping, commodities, and labor were the three most popular sources of pressure. 

Shipping, commodity prices, and higher wages were the most common sources of inflation pressures cited by consumer staples companies during first quarter earnings conference calls. (Source: FactSet)
Shipping, commodity prices, and higher wages were the most common sources of inflation pressures cited by consumer staples companies during first quarter earnings conference calls. (Source: FactSet)

The solution to protecting margins for these companies, then, is simple: raise prices. Some 18 of the 26 consumer staples companies that mentioned inflation referenced "pricing" in some form or fashion as a way to offset higher costs. 

Which isn't exactly welcome news to consumers.

Two weeks back, data on consumer prices in May showed the consumer price index jumped by 5% over the prior year, the biggest jump since 2008. This past week, data on producer prices showed a 6.6% jump over last year in May, the biggest increase since 2010. 

And if the commentary flagged by FactSet is any indication, elevated producer prices could continue feeding into higher prices. It's just not clear this is a problem yet for the stock market. 

By Myles Udland, reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland

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