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Recession Calls Grow As Inflation Threatens Corporate Earnings And Rising Costs Hit Consumers

Topline

Despite a decent start for earnings season, Wall Street experts are increasingly warning that corporate profits are likely to take a hit as inflation remains a “headwind” to economic growth and pricing pressures take a bigger toll on consumers.

Key Facts

Rising costs due to inflation are beginning to impact corporate profit margins and pricing pressures are hitting consumers, warned Morgan Stanley strategist Michael Wilson in a note on Monday, adding that “growth is slowing” while the “risk of recession has increased.”

The firm notes that first-quarter earnings results could be disappointing, with a marked “downtrend” in S&P 500 companies earnings’ revisions in recent weeks as they deal with inflationary pressures, with 73 negative pre-announcements compared to 26 positive, according to Refinitiv data.

What’s more, out of the companies that have reported first-quarter earnings so far, many are warning about the heightened impact from inflation, as pricing pressures affect both margins and consumer demand.

In its earnings call last week, retailer Bed Bath & Beyond admitted that its business “has been impacted by extraordinary macroeconomic factors” including “unprecedented inflation,” which has weighed on consumer confidence.

Restaurant traffic and customer demand “may be more volatile in the near term as consumers face significant cost inflation,” food processing company Lamb Weston warned on its earnings call earlier this month.

Restaurant chain BurgerFi similarly said last week that rising costs have hit margins across the industry, and that it would “have no choice” but to keep raising prices if “pervasive inflationary pressures” persist.

Crucial Quote

“Margin expectations look overly optimistic for the balance of ’22, given the myriad of cost pressures companies face,” Morgan Stanley’s Wilson said. The Russia-Ukraine conflict “has led to a spike in energy and food costs, which serve as nothing more than a tax on a consumer that is already struggling with high inflation.”

What To Watch For

With inflation rising 8.5% in March compared to a year ago—the biggest increase since 1981, investors also worry that the Federal Reserve’s plan to aggressively raise interest rates could hurt economic growth. Amid growing recession calls on Wall Street, the Fed’s policy tightening “raises the odds of recession” to 15% in the next year and 35% within the next two years, according to Goldman Sachs chief economist Jan Hatzius. In the post-World War II era, 11 out of 14 monetary policy tightening cycles have been followed by a recession within the next two years, he warned in a recent note. “Taken at face value, these historical patterns suggest the Fed faces a narrow path to a soft [economic] landing.” Earlier this month, Deutsche Bank became the first major bank to predict a looming recession, and since then a rising number of firms have joined the chorus and issued similar warnings.

Surprising Fact

Within the S&P 500, 356 companies cited the term “inflation” during their earnings calls last quarter—the highest number since at least 2010, according to FactSet data. If the current trend continues, that number could be even higher this quarter.

Further Reading

Major Bank Is First To Forecast A Recession—More Could Follow (Forbes)

JPMorgan Boosts Credit Reserves As Profits Tank, Jamie Dimon Warns About ‘Significant Challenges Ahead’ (Forbes)

Federal Reserve Hints At Bigger Rate Hikes Ahead, Outlines Plan To Shrink Balance Sheet (Forbes)


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