Companies try to pass on the increase in costs to consumers, but history shows that they are not immune to inflationary pressures, and these hurt profitability, while raising input prices, ie raw materials, salaries and transportation prices in competitive markets do not fall entirely to consumers and some is reflected in shrunken gross profit. So although we will probably see an increase in revenue due to price increases, this growth is not expected to be reflected in a similar improvement in the bottom line.
In this case, the so-called “pricing power” is expressed. Everyone, both consumers and companies, knows that there is inflation and expects a certain price increase. However, companies with strong pricing power, that is, with the ability to raise prices without hurting the quantities sold, will be able to raise prices more than the rise in input prices and may even show an improvement in profitability.
The results of the second quarter will already fully reflect an economic environment of oil prices higher than $ 100 per barrel, while other commodities are also traded at high prices, rising salaries and rising interest rates that increase financing costs while continuing difficulties in global supply chains. All of these will be reflected in the company reports that will likely clearly mark the line between companies with strong pricing power and the rest.
According to Jonathan Golub, chief strategist of American equities at Credit Suisse, the income of companies in the S&P 500 index is expected to grow by 10.3% compared to the corresponding quarter, but earnings per share are expected to rise by only 5.5%, ie a sharp decline in profitability.
The companies that are expected to see the improvement in profitability are cyclical companies, including those of energy and commodity producers whose market prices of the products they sell are soaring. According to Golub, the income of these companies is expected to rise by 23%, while earnings per share will jump by 51.7%. In non-cyclical companies, on the other hand, it expects an increase of only 4.5% in revenues and a decrease of 1.1% in profits. Non-cyclical companies are technology, healthcare and infrastructure companies among others.
Apart from the results themselves, according to the company executives, the post-publication conference calls will have no less important weight and will most likely set the tone for continued trading in those shares. Analysts will try to analyze the profitability forecast for the current quarter and the following based on the data they will provide. These will probably try to show that the rise in interest rates and inflation has not hurt sales when revenue is seen on it and the number of units sold will not hurt, but what they will say in relation to expected profitability is what will focus the most attention.
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