With his statement that inflation is “deeply entrenched” in the American economy and has an influence on circumstances on a number of fronts, David Solomon, CEO of Goldman Sachs set the tone early in this earnings season.
After that, company leader after company leader expressed similar sentiments.
The majority of the respondents said they’ve been able to handle inflation at its highest level in over 40 years. Their models are being adapted to the uncertainty of the future by cutting costs, raising prices and generally adapting to the uncertainty.
Tesla’s founder Elon Musk practically apologized for his company’s price hikes on its earnings call.
“So I do feel like we’ve raised our prices. Well, we’ve raised our prices quite a few times. They’re frankly at embarrassing levels,” said the mercurial auto pioneer. “But we’ve also had a lot of supply chain and production shocks, and we’ve got crazy inflation. So I am hopeful, this is not a promise or anything, but I’m hopeful that at some point we can reduce the prices a little bit.”
The only certainty at the moment seems to be that inflation is on everyone’s mind.
The topic of inflation has been raised on 85 of 91 analyst calls for S&P 500 companies so far, according to a FactSet transcript search.
The consumer pays the price
Company officials know that inflation will slow from a year ago’s 8.6% quarter-over-quarter growth rate, measured by CPI. This is the highest level of inflation since November 1981, when the CPI was 9.1%.
Despite the uncertain environment, the companies are not taking any risks, using their pricing power now to boost their top and bottom lines.
“Our primary response to the environmental challenge of inflation is higher pricing,” said Michael F. Klein, who heads Travelers’ personal insurance division. “We are pleased with our actions to increase rates over the past few quarters and remain confident in our ability to achieve further increases.”
As the earnings season approaches, the results so far have countered Wall Street’s generally pessimistic outlook.
Refinitiv reports that 78% of S&P 500 companies have reported profits that beat estimates, up 6.3% from a year ago. Sales increased by 11.3%, beating revenue by 72.5%.
In spite of the fact that energy companies have boosted aggregate top and bottom lines, consumers seem to be able to handle the burden of higher prices, at least for now.
“We have been able to and continue to be able to pass through our product cost inflation to our customers, and they are increasingly finding ways to pass that through to their consumers as well,” Sysco CFO Aaron Alt said. “We’re confident that will continue to be the case certainly in here and now.”
Fighting recession fears
The looming recession has alarmed economists who believe that a slump in consumer spending could dampen a trend that has been persistent but short of inflation.
Jane Fraser, CEO of Citigroup, has been focused on the “three Rs” which are: Rates, Recessions and Russia.
As a result of the Russian invasion of Ukraine, supply chains have been strained and inflation has accelerated. The Federal Reserve is attempting to moderate inflation by increasing interest rates aggressively. In the first quarter, the economy contracted by 1.6%; Atlanta Fed projections estimate that it will shrink by the same amount in the second quarter.
However, Fraser explained that the U.S. won’t enter an official recession or at least not one that is severe, despite two consecutive quarters of negative growth. Officially, the National Bureau of Economic Recession decides when a recession or expansion occurs.
“It’s just an unusual situation to be entering into this choppy environment when you have a consumer with strong health and such a tight labor market,” said Fraser. “And I think that’s where you hear so many of us not so much concerned about an imminent recession in the [United] States.”
But Solomon, the company’s CEO, said the company is playing it safe even though its economists expect inflation to drop in the second half of the year.
“I think our tone is cautious because the environment is uncertain. The environment is very uncertain,” he said. “There’s no question that economic conditions are tightening to try to control inflation, and as economic conditions tighten, it will have a bigger impact on corporate confidence and also consumer activity in the economy. I think it’s hard to gauge exactly how that will play out, and so I think it’s prudent for us to be cautious.”
