What’s growing faster than inflation? Profits are growing faster than consumer prices.
Last year ended with a stew of seemingly contradictory economic forces: Inflation was at a 40-year high, yet holiday spending was setting records. The coronavirus omicron variant was beginning its rapid spread, yet consumer confidence remained strong. And the Federal Reserve quickly changed course to signal a willingness to raise its target short-term interest rate much sooner than expected, yet the stock market closed the year near record highs.
The crush of fourth-quarter corporate financial reports begins in the week ahead. Profits are predicted to have grown by almost 22 percent compared to a year earlier, according to market data firm FactSet.
Bear in mind that the comparison is to 2020 results when profits were pinched by the first year of the pandemic. Still, this represents the rebound investors have been pricing in by bidding up stock prices throughout last year.
The early year volatility in stock prices can be attributed to investors trying to gauge how the fast-changing Fed policy may impact the fast-growing economy, and by extension, the profit picture in 2022.
Now investors will begin hearing from companies about how they are seeing the prospects of higher borrowing rates affect their customers and businesses. Already, earnings growth will slow considerably thanks to the more difficult comparisons to the strong 2021 profits. Analysts expect earnings to jump by more than 9 percent this year, FactSet said.
If the central bank acts faster to fight inflation by hiking interest rates, that could slow the economy and profit growth further. Many of the financial reports beginning this week will be the first updates companies have provided since the Fed signaled its willingness to get more aggressive fighting inflation.
Profit margins have been close to record highs. Those will be closely scrutinized to see how firms are planning for higher input costs, including the need to raise wages to attract and retain workers, and their ability to leverage any pricing power they may have with customers.
And then there is COVID-19. The economy may be less vulnerable to the virus than it was earlier in the pandemic, but it isn’t immune. Travelers have canceled trips, plans to return to offices have been postponed, and companies have experienced worker shortages during this omicron surge.
It may be early in the year, but investors are already looking for clues about what the rest of the year may hold.
