Insights

Are higher costs hampering corporate profits?

ARTICLE  | 

Authored by RSM US LLP


Source: FactSet, as of 5/5/2021

Investors are closely watching first quarter earnings to gauge the extent to which corporate profits are being impacted by supply chain issues, rising raw materials costs, and labor shortages. The S&P 500 Index has already posted 25 record highs this year, suggesting investors are unconcerned that higher input costs and labor shortages will materially impact profits. However, the number of firms that have mentioned inflation on earnings calls this quarter has risen versus the same period last year. That hasn’t happened since 2018. Prices did subsequently rise, but by less than what earnings calls suggested and by less than the year prior1.

Looking at the 75% of S&P 500 firms that have reported first quarter earnings thus far, data show that companies in aggregate have been able to increase profit margins on the back of sharply rising revenues. Pent-up demand from consumers, who have extra money in the bank thanks to massive fiscal stimulus, is helping firms regain sales momentum. And for S&P 500 companies, their large size often enables economies of scale, which means incremental sales translate to incrementally higher profits. As the chart illustrates, sales rose modestly more than expenses; however, operating margins2 expanded a full percent to 16.2% from the 15.2% seen in the fourth quarter of 2020, leading to a 38.3% spike in operating income.

We expect price increases at the retail level to become more evident in the coming quarters. Many firms — including Proctor & Gamble, Kimberly Clark, Berkshire Hathaway, and others — noted that they have, or intend to, pass along higher input costs to consumers. However, price increases would reflect in part a bounce back from the deflationary trends seen in the first half of 2020. Further, while inflation may ramp up in the near term, we see little evidence at this point to suggest runaway (structural) inflation is likely.

1U.S. Bureau of Labor Statistics

2We use earnings before interest and taxes (EBIT) to measure operating margin, compared to net income, as we believe it is a better measure of recurring earnings power.

Wealth Management Disclosure

Let's Talk!

Call us at +1 213.873.1700, email us at solutions@vasquezcpa.com or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by RSM US LLP and originally appeared on 2021-05-10.
2020 RSM US LLP. All rights reserved.
https://rsmus.com/what-we-do/services/wealth-management/market-insights/are-higher-costs-hampering-corporate-profits.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

​Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.

For more information on how ​Vasquez & Company LLP can assist you, please call +1 213.873.1700.

Subscribe to receive important updates from our Insights and Resources.

  • Should be Empty: