(Bloomberg) — The conventional wisdom with stock bulls is that prices will take off when the Federal Reserve wins its fight against inflation. But the end of surging consumer costs could unleash another round of bad news.
Most Read from Bloomberg
A small chorus of researchers has for months warned of a potential hazard to earnings should the campaign to tamp down inflation succeed. Specifically, the squeeze on margins that could occur should an indicator known as corporate operating leverage suffer in an environment where sales flatten out.
The indicator is a measure of the difference between a company’s fixed and variable costs. It can turn negative in the wake of peak inflation when some of a company’s costs remain high but isn’t able to offset them by raising prices because demand has faltered.
While earnings held up surprisingly well throughout the pandemic and powered a number of bear market rallies, a fall in operating leverage could prove to be the final hazard that brings stocks to their eventual lows, according to a team of Morgan Stanley strategists led by Mike Wilson.
“Thinking about the areas of inflation that are likely to remain more resilient into next year (shelter, wages, certain services) and the areas that are likely to decelerate (goods) does not paint a constructive picture for S&P 500 margins, in our view,” Wilson, one of Wall Street’s biggest equity bears, wrote in a recent note to clients.
Operating leverage, which his team measured by subtracting sales growth from earnings per share growth, is unlikely to stay positive in the coming quarters, according to his team. And while he’s one of the many sell-side analysts voicing concerns of a margin contraction, consensus estimates are still positive for next year.
Equity analysts expect earnings to increase 5.56% for the first quarter of 2023 versus a 5.48% jump in sales as margins expand. The pattern currently holds for the full year 2023 as well: earnings are anticipated to rise more than sales as operating leverage remains positive.
Credit Suisse AG’s Jonathan Golub stands with Wilson’s view. While explaining his recent S&P 500 price target downgrade, he wrote that “declining CPI combined with sticky wages should lead to a margin contraction.”
Wilson’s team has been arguing for months that the ultimate low for stocks will not be determined by the Fed, but by the growth trajectory of earnings. He sees the S&P 500 bottom in a 3,000- to 3,400-point range occurring later in 2022 or early next year.
Read More: Morgan Stanley’s Wilson Says Stocks Can Get a Lift Into Earnings
While stocks have shed more than 22% year to date, a number of sell-side analysts say bad earnings news has already been priced in, and earnings could actually surprise and rise. Global 12-month forward earnings have been revised down every month in the last quarter. To Jim Paulsen of The Leuthold Group — an ardent stock bull — the fact that profit margins broke historical patterns and held up while inflation has soared means they may not be due to come down after all.
But to Liz Ann Sonders, chief investment strategist at Charles Schwab, profit margins may take a hit as companies lose their power to raise prices sufficiently enough to offset high fixed costs.
“Inflation especially early in the cycle tends to mean pricing power for companies,” Sonders said. “Demand is strong and spending is strong. That’s great news for earnings. If then you lose the demand side and you lose the inflation which helps boost prices, that’s when you can run into trouble.”
Most Read from Bloomberg Businessweek
©2022 Bloomberg L.P.
Timing the market has been a nagging question for investors ever since the stock market began its decline by roughly 25% in January this year. The right answer likely hinges on whether or not the Federal Reserve follows through with plans to raise its benchmark interest rate to 4.5% or higher next year. Global markets are on edge about the possibility of an emerging-markets crisis resulting from higher interest rates and a U.S. dollar at a 20 year high, or a slump in the housing market due to rising mortgage rates, or the collapse of a financial institution due to the worst bond market in a generation.
(Bloomberg) — The Federal Reserve is closing ranks around a goal of quickly raising their benchmark interest rate to around 4.5% then holding it there, while being prepared to go higher if elevated inflation fails to show signs of easing.Most Read from BloombergRussia Races to Reopen Key Crimea Bridge Damaged in Fiery BlastFacebook Is Warning 1 Million Users About Stolen Usernames, PasswordsNATO Once Feared a Putin Victory. Now It Worries Over His DefeatBiden Should Hit Saudi Arabia Where It Re
(Bloomberg) — Most Read from BloombergRussia Races to Reopen Key Crimea Bridge Damaged in Fiery BlastFacebook Is Warning 1 Million Users About Stolen Usernames, PasswordsNATO Once Feared a Putin Victory. Now It Worries Over His DefeatBiden Should Hit Saudi Arabia Where It Really HurtsBiden Says Putin Threats Real, Could Spark Nuclear ‘Armageddon’A possible ban on Russian supplies by the London Metal Exchange would be a seismic event for the metals industry, cutting some of the world’s biggest c
(Bloomberg) — Former Treasury Secretary Lawrence Summers said it’s important for the Federal Reserve to deliver on the further monetary tightening it has signaled, even in the face of financial risks stemming from its actions.Most Read from BloombergRussia Races to Reopen Key Crimea Bridge Damaged in Fiery BlastFacebook Is Warning 1 Million Users About Stolen Usernames, PasswordsNATO Once Feared a Putin Victory. Now It Worries Over His DefeatBiden Should Hit Saudi Arabia Where It Really HurtsBi
The Wall Street Journal
You would think this would be TIPS’ time to shine. Instead, the prices of Treasury inflation-protected securities—government bonds that are adjusted to keep up with inflation—have declined this year, even as inflation has soared. The comparable loss for ICE’s index of regular Treasury bonds was 13.5%.
(Bloomberg) — China criticized expanded US restrictions on its access to semiconductor technology, saying they’ll harm supply chains and the world economy.Most Read from BloombergRussia Races to Reopen Key Crimea Bridge Damaged in Fiery BlastFacebook Is Warning 1 Million Users About Stolen Usernames, PasswordsNATO Once Feared a Putin Victory. Now It Worries Over His DefeatBiden Should Hit Saudi Arabia Where It Really HurtsBiden Says Putin Threats Real, Could Spark Nuclear ‘Armageddon’President
Yahoo Finance Video
Insigneo CIO Ahmed Riesgo and Todd Sohn, Managing Director of Technical Strategy at Strategas, a Baird company, join Yahoo Finance Live to discuss the market outlook amid the Fed’s interest rate hikes and recent employment data, and also talk about trading in volatile or recessionary periods.
The year 2022 has been a painful journey for semiconductor manufacturers. Following the example of AMD , Nvidia and Intel , which are the three main players in the sector, 2022 is a year to forget .Their valuations are in recession. Advanced Micro Devices (AMD) currently has a market value of $94.4 billion, which is a decrease of at least $83 billion compared to December 31, 2021.
Will a recession hit in 2023? For months, economists have been warning that things could take a notable turn for the worse next year as the Federal Reserve moves forward with aggressive interest rate hikes. While it’s easy enough to make the case for a near-term recession, the reality is that today’s job market is very strong.
Rivian is now building its R1Ts, and despite the hiccups they have done the impossible by creating an extremely impressive vehicle from the ground up. But it needs to build them faster, cheaper, and more profitably to sustain itself.
Here’s why car and truck fans should root for Rivian to do just that.
(Bloomberg) — Signs are piling up that the tech downturn may be deeper and longer-lasting than feared. Most Read from BloombergBiden Says Putin Threats Real, Could Spark Nuclear ‘Armageddon’Kremlin Lets State Media Tell Some Truths About Putin’s Stalling WarMusk’s Twitter Takeover Hits Snag Over Debt-Financing IssueNord Stream Leaks Caused by Detonations in Sign of SabotageBiden Should Hit Saudi Arabia Where It Really HurtsAfter years of record capital spending, chipmakers are warning on a week
AMD stock is hitting 52-week lows as it reports disappointing preliminary revenue results. Here’s when to buy the chipmaker’s shares.
Commodities trading means you’re buying and selling raw materials rather than finished products (like a house) or financial assets (like stocks and bonds). Commodities are assets like corn, coffee, lumber and ore. One common form of commodities trading is investing … Continue reading → The post Gold vs. Silver Investments: Which Is Better? appeared first on SmartAsset Blog.
These are the oil and gas stocks with the best value, fastest growth, and most momentum for Q4 2022.