With 40% of the S&P 500 companies having reported Q3 earnings we now have a good picture of the corporate sector in Q3. Revenue is up 0.2%, 1.5%, and 3.1% q/q for MSCI World, S&P 500, and Nasdaq 100 respectively indicating good momentum on the top line. However, earnings per share is rising much less and is even negative for MSCI World (-1.2% q/q), causing net profit margins to shrink for the first time in five quarters.
Rising energy prices and commodity prices in general will put enormous pressure on input costs. But as if commodity prices were not enough, wage pressures are also accelerating in many industries and recently the US quit rate (the percentage of labour force voluntarily quitting their work) has shot up to almost 3%, the highest level ever observed since the time series was started in 1999. In other words, companies are under pressure from all sides on their costs, and even interest rates are beginning to rise again. The last time we had a declining profit margin environment was from Q2 2018 to Q4 2019 before the pandemic were equities had a troublesome period only saved in the last months before the pandemic because falling interest rates were causing a “there is no alternative” trade in equities.