Inflation is good for earnings in nominal terms
In a previous equity note on inflation in a historical perspective we highlighted that US earnings grew faster than the long-term trend growth during the 1970s as inflation lifts prices across the board and therefore also growth (nominal) figures. The 1970s was also a decade of very high interest rates compressing equity valuations to such as degree that the negative impact was larger than the positive dynamics from higher earnings growth. Whether those dynamics will play out again is difficult to speculate about.
What we can say is that inflation is once again lifting all boats with Q2 earnings in the MSCI World Index hitting a new all-time high up 7% y/y and 19% q/q driven by an acceleration in revenue growth (see chart below) and a significant rebound in operating margin as companies are exercising better cost controls. Operating margins are a mean reverting process and the current rebound in margins is at odds and potentially just a short-term temporary dynamic before they trend lower gain towards the average. A further slowdown in the economy would likely set in motion a renewed pressure on margins.