Is Inflation Finally Biting into Corporate Profits?

Companies' current formula β€” passing price increases onto customers β€” is showing signs of reaching its limit.

Trader Robert Arciero works on the floor of the New York Stock Exchange, Aug. 10, 2021.
Trader Robert Arciero works on the floor of the New York Stock Exchange, Aug. 10, 2021.
AP Photo/Richard Drew, File

NEW YORK (AP) β€” Since inflation began bursting higher last year, big U.S. companies have found a simple way to keep making record profits: Pass all those price increases along to their customers.

But the formula may be showing signs of reaching its limit, which adds drama to the upcoming earnings reporting season. CEOs are lining up to tell investors in upcoming weeks how much their businesses earned in the first three months of the year. They're widely expected to say that growth for the S&P 500 will be the slowest since the end of 2020.

Analysts are forecasting a 4.7% rise in earnings per share from a year earlier, according to FactSet. If they’re right, it would mark the first time S&P 500 earnings growth fell short of 10% since the final three months of 2020, according to FactSet.

Consider Delta Air Lines, which next week will be one of the first companies to report results. When the quarter began, analysts were forecasting a loss of 68 cents per share. By March 31, analysts downgraded their forecasts to a sharper loss of $1.36 per share, in large part because surging oil prices raised jet-fuel costs. That’s despite Delta’s saying in mid-March that it would likely make more in revenue during the quarter than it earlier expected.

Not only are companies' costs continuing to rise, but their customers may also be starting to balk at paying the higher prices getting passed along. U.S. consumer spending rose in March from February, for example, but the increase was entirely because of the higher prices consumers paid for products and services. After taking that inflation into account, consumers reined in spending by more last month than economists expected.

An easy way to gauge how much inflation is biting into profits is to look at the profit margins companies will report in upcoming weeks. These show how much in profit companies are holding onto from each $1 of revenue. This earnings reporting season, analysts are forecasting the profit margin for S&P 500 companies to drop to 12.1% from 12.4% at the end of 2021 and from 12.8% a year earlier.

Some companies are actually benefiting directly from the high inflation sweeping the world, of course. Energy producers are forecast to report the biggest revenue and profit growth for the quarter because prices soared for their oil and gas.

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