2022-06-23 13:18:11
How can inflation distort companies' performance?
The 2nd quarter ends in a week. Many corporations will show an increase in revenue and profits. Immediately, analysts will start praising different stocks and recommending them for purchase. But this is a trap:
- First, revenue and profit growth must be higher than inflation. If inflation was 5 percent in six months and the company's sales rose 5 percent, it means that at best the company stayed put. How inflation is counted in the United States is a separate story. But even the official inflation rate is above 8% per year. And if a company is not growing at 8% a year, it is stagnating.
- Second, during the period of fiscal stimulus and money handouts, the population has accumulated considerable savings. And so far, they are spending them without noticing inflation. This is confirmed by data on consumer activity. Which has not yet begun to fall.
When the population uses up their savings, we will see a drop in consumer activity. And that means a drop in sales for companies. That is, the current buoyant financial performance of corporations does not yet reflect the negative effects of inflation.
- The same goes for corporate margins. It's on the rise right now. That's because companies are shifting price increases to consumers. At the same time, wages are lagging behind sales growth. In the end, this situation will inevitably lead to a drop in consumer activity and a decline in corporate performance.
Inflation may not seem to be a problem at first and may even make investors happy with rising financial performance of stocks. But over time, the population will use up their savings, consumer activity will decline, and business margins will shrink.
@ESG_Stock_Market
#inflation
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