Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Big S&P 500 Bear Market Case Sees Inflation Finally Eating Everything

Stock MarketsDec 29, 2021 08:58AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Big S&P 500 Bear Market Case Sees Inflation Finally Eating Everything

(Bloomberg) -- Corporate America’s well-oiled earnings machine has been the backbone of virtually every bullish equity argument this year. It’s helped stocks power past the Federal Reserve’s hawkish pivot and each new variant of the coronavirus. But stubbornly high price pressures may end up forcing a rethink of those ever-increasing profitability predictions.

So goes the main bear case on U.S. stocks, which notes that after a steady climb since last year, 12-month estimates for the S&P 500’s operating margins have stalled out since mid-October. The plateau coincided with the start of an earnings season that saw companies sound the alarm on rising input costs and labor difficulties.

While enough companies were able to successfully pass along those costs to consumers, boosting index-level profit margins to all-time highs, the recent leveling in estimates could make a repeat performance difficult. While demand is robust, persistently high inflation will erode it, according to Bloomberg Intelligence’s Gina Martin Adams. It’s unclear whether shoppers will continue to be willing to pay higher prices, she said.

“Consumers are starting to get fed up with price increases and they’re starting to fight back, and we’re seeing that manifest itself in margins,” said Martin Adams, BI’s chief U.S. equity strategist. “Prices don’t rise as long as operating margin forecasts are falling.”

Signs that the American consumer is starting to buckle under the fastest pace of inflation in decades emerged last week. Data showed that purchases of goods and services, after adjusting for higher prices, were little changed in November. That stagnation in spending came in a month when real wage growth declined by 1.9%.

So far, inflation’s impact on the stock market has been ambiguous at best in a year when the S&P 500 is poised to close 27% higher. Despite supply-chain snarls and labor shortages, every sector has posted double-digits gains in 2021 -- helped by the fact that net-profit margins climbed across most major industries last quarter.

And Wall Street analysts aren’t fussed by the prospect of price pressures. They see S&P 500 profits climbing almost 9% next year to $220.40 a share. Still, even with that increase, the index trades at a forward price-earnings ratio of almost 22 -- very much at the high end of the historical range and a level that suggests riskiness should results fail to hit the mark.

The emergence of the omicron variant may make it difficult to pull off that lofty profits goal. While data indicate the strain is less deadly than predecessors, it has the potential to further exacerbate supply bottlenecks as countries fight to contain the spread, according to Richard Bernstein Advisors’s Dan Suzuki. 

“It’s a pretty fragile supply chain as it is, just as we’re starting to see potentially some signs of relief. To see it continue, that’s definitely putting upward pressure on inflation,” said Suzuki, the firm’s deputy chief investment officer. “When the Fed has just recently started to have serious concerns about inflation, it’s clearly going to move the needle.”

Put together, it may lead to a market environment similar to the first few months of 2021, when long-dated Treasury yields spiked in response to building inflation expectations. Richly valued technology shares -- which make up the bulk of the biggest benchmarks -- are vulnerable in that environment, Suzuki said. Meanwhile, the Fed is expected to deliver three interest-rate hikes in 2022, adding to the pressure. 

Despite months of sustained inflation and deeply negative inflation-adjusted wage growth, American consumers have hung tough -- the University of Michigan’s final sentiment index actually rose in December. However, the inflection point for demand is nearing, in the eyes of Miller Tabak + Co.’s Matt Maley.

“If inflation remains strong, consumer confidence will begin to wane,” said Maley, the firm’s chief market strategist. “At some point, the higher prices causes consumers to pull in their horns and that will hurt profits in our consumer-driven economy.”

Read the other side of the argument: Big S&P 500 Bull Case Lives On in Unwavering Profit Forecasts

©2021 Bloomberg L.P.

 

Big S&P 500 Bear Market Case Sees Inflation Finally Eating Everything
 

Related Articles

Dollar Tree Earnings, Revenue Beat in Q1
Dollar Tree Earnings, Revenue Beat in Q1 By Investing.com - May 26, 2022

Investing.com - Dollar Tree (NASDAQ:DLTR) reported on Thursday first quarter earnings that beat analysts' forecasts and revenue that topped expectations. Dollar Tree announced...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (9)
Al Ose
Al Ose Dec 29, 2021 12:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
PE compression will result. Its why we will have correction or close it in april and then again august. Screen shot this preductive gem.
Mark Manley
Mark Manley Dec 29, 2021 10:30AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
You can always count on financial rags to try to manipulate the market to support their own bets, $100 says Bloomberg has already bet on the down side.
Ronald Warren
Ronald Warren Dec 29, 2021 10:26AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
All the risk at stake going into the new year!! The Biden media is amazing!! They simply don't publish negative news!! On Monday morning 1/3, I'm gonna' be short as a Munchkin on steroids!!
Casador Del Oso
Casador Del Oso Dec 29, 2021 10:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
wait until the inevitable interest rate hikes occur
Steve Bojo
Steve Bojo Dec 29, 2021 10:23AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Well duh
Jose Mibaresh
Jose Mibaresh Dec 29, 2021 9:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Inflation means higher prices....on stocks
ben sc
ben sc Dec 29, 2021 9:26AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
2022 Bear rout incoming
Erski Gumby
SB20 Dec 29, 2021 9:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Brandon and Pow Pow will take care of that inflation.
Chad RicherThanYou
Chad RicherThanYou Dec 29, 2021 9:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The USA is an embarassment
Erski Gumby
SB20 Dec 29, 2021 9:25AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Cope
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email