After Bumper 2021, companies may struggle to increase profits

An analysis of more than 2,000 publicly traded companies outside the financial sector by the New York Times showed that most of them boosted sales faster than costs, which is astonishing when the cost of wages, raw materials and components was rising and supply chains were broken.

As a result, profit margins, which measure how much money a business earns on each dollar of sales, have risen above the previous pandemic average. In total, the companies received an additional $ 200 billion in operating profit last year due to this increase in margins.

Unexpected earnings have boosted stocks in a wave of market boom, but potentially beyond business fundamentals. Price-to-earnings ratio – an indicator of how much investors pay for each dollar of corporate earnings – has risen to a peak of 23 for all S&P 500 companies, up from an average of 18 in the previous decade. Pandemic. At such an elevated price-to-earnings ratio, stock prices were particularly vulnerable to selling.

And now there are good reasons for investors to worry about profits. Many federal incentive programs created during the pandemic have been completed or are being completed. The Fed raises interest rates. And corporate executives warn that supply chain problems that may have helped them increase profits last year have become a burden.

Deere, a maker of agricultural, construction, horticultural and other equipment, said the cost of materials is still rising and it lacks parts to finish certain products, which is delaying sales. Cisco, which manufactures computer networking equipment, also complained that it could not get certain components.

Of particular concern to investors are signs that demand for some goods and services is declining or declining altogether. Walmart noted that high food costs have reduced demand for other products. And while Target expected demand for clothing and household goods to decline as government stimulus dwindled, the company “did not expect the magnitude of this change,” said its chief executive, Brian Cornell.

Shares of the clothing retailer Gap fell sharply last week after it announced disappointing earnings for the first three months of the year, as well as a more pessimistic outlook for its earnings for the rest of 2022. The firm was greatly affected by the deep decline. Sales for its Old Navy brand, which appeals to low-income customers as it carries lower goods than in Gap stores.

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