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Inflation Inflated To A Forty-Year High
getty
First, the good news for last week is that the fourth-quarter earnings season is almost three-quarters done, and results have been well ahead of expectations. 72% of S&P 500 companies have reported results so far, with 77% and 77% exceeding consensus earnings and sales estimates, respectively. The S&P 500 has 62 companies scheduled to report earnings this week.
S&P 500 Earnings Season As Of 2/11/2022
Glenview Trust, FactSet
Most sectors blended earnings, which combines actual with estimates of companies yet to report, above estimates at the end of the quarter. The year-over-year growth rate can’t be shown for the energy sector since it had losses in the same quarter a year ago. The growth rate for the industrials is misleading since several companies in aerospace reported a loss in the fourth quarter of 2020 and improved or posted a profit this quarter.
Fourth-Quarter 2021 Blended And Estimated Earnings: Year-Over-Year Change As Of 2/11/2022
Glenview Trust, FactSet
Most sectors are also posting blended revenues above estimates at the end of the quarter. In addition, looking at sales allows us to see the massive rebound in the energy sector. The only S&P 500 sectors with price gains year-to-date are energy and financials.
Fourth-Quarter 2021 Blended And Estimated Sales: Year-Over-Year Change As Of 2/11/2022
Glenview Trust, FactSet
As expected, the actual earnings performance exceeds expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate improved to 30.3% year-over-year versus the expectation of 21.4% at the end of the quarter.
S&P 500 Blended And Estimated Earnings: Year-Over-Year Change As Of 2/11/2022
Glenview Trust, FactSet
Interestingly, according to FactSet, 73% of companies reporting earnings this quarter have mentioned “inflation” during their earnings conference call with analysts. This percentage is the highest going back to at least 2010! Coincidently, the January consumer inflation (CPI) reading rose to a forty-year high of 7.5% year-over-year. Price gains were widespread and went beyond increases due to supply chain problems. Supply chain-induced price increases were still evident, with used car prices rising 40.5% year-over-year, but the price gains show evidence of becoming more entrenched. For example, rent and housing costs within the CPI data continue to climb. These types of price increases tend to be less transitory.
Rent Inflation
Glenview Trust, Bloomberg
The Atlanta Federal Reserve’s measure of Sticky CPI rose to almost 4.2%. Measures from other regional Federal Reserve banks that attempt to remove the volatile components of inflation to measure a core reading were even more elevated than Atlanta’s reading.
Underlying Inflation
Glenview Trust, Bloomberg
The financial markets reacted quickly to the inflation news. An increase in the policy rate from the Federal Reserve in March is considered a given now, and the hike could be 0.50% instead of the more typical 0.25% increase. The 3-month yield 18-months forward is now discounting over six hikes of 0.25% over the next year and a half. In the wake of the hot CPI report, the U.S. 10-year Treasury yield rose above 2%. Still, fears surrounding a possible military conflict with Russia over Ukraine caused yields to fall on Friday afternoon as Treasuries benefitted from a flight to safety.
Expected Fed Rate Hikes As Of 2/11/2022
Glenview Trust, Bloomberg
Earnings season continues at a slower pace this week. In addition, January retail sales will be an essential measure for the state of the U.S. consumer who is facing higher prices and a good measure of economic resilience in the first quarter. Multiple Fed speakers are on the calendar this week, and investors will be listening closely for hints as to the size of the March hike. All the fundamental data could take a back seat to fears regarding the rising tensions between the U.S. and Russia over Ukraine.
