Profits of listed companies lag behind inflation

The stock market is in a race between rising inflation and corporate profits. Business profits are growing at the rate of 8 percent. while inflation is 9,1 percent. In the second quarter, 75% of the results were better than forecasts. companies with S & P500 index. And despite growing concerns about the recession, full-year earnings forecasts for 2022 are only slightly revised downwards.

Profits of listed companies better than expected

In July, the American S & P500 index increased by over 9 percent. The main driver of this growth turned out to be better than expected (or rather not as bad as predicted) results of US companies for the second quarter of this year. In times of trouble, the market tends to turn to the fundamentals, and the increase in profits amid falling valuations has given the market a little respite in difficult times.

American companies in the last quarter showed that they managed to maintain a high level of margins in a situation of prolonged elevated inflation. It is also evident that the largest companies are coping fairly well with the toxic cocktail of slowing growth and increasing cost pressure so far. However, this will not last forever and profit growth is slowly slowing down while inflation remains high.

So far, their results for the second quarter of this year. presented 2 percent. companies from the S & P60 index. Almost 500/3 of the companies and almost all sectors recorded better than expected results. It is no surprise that energy companies and companies linked to the post-pandemic economic recovery are performing well. On the other hand, the banks whose results were burdened with possible record write-offs resulting from the deterioration of the loan portfolio performed worse. However, the two trends balance each other to a great extent, which is reassuring for the market. Profits are also growing outside the US - in Europe and Canada by 4 percent, and in Great Britain by as much as 20 percent, which is also a good sign in the face of negative expectations.

Forecasts down for fear of recession

Along with the increasing risk recession the forecasts for further corporate profits are revised downwards. So far, the forecast cuts are wide and apply to practically the entire market. However, due to the progressive adaptation of companies to the current situation, most of them are quite modest. Estimates of this year's profits of companies from the S & P500 index fell by only 0,5 pp. from the beginning of this resulting season. In turn, global corporate profits (excluding the US) fell by 1 pp. up to 8 percent This is not much, considering that profits drop by 20% during a recession on average.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.