Is Higher Inflation Having a Negative Impact on S&P 500 Earnings for 2021?

After a decade of economic expansion during which annual consumer price (CPI) inflation averaged just 1.8%, consumers are now dealing with price increases of magnitudes they haven’t faced in nearly 13 years. Total May CPI was up 5.0% compared to May 2020, while core prices (excluding food and energy) were up 3.8%. For more details on the latest CPI and PPI numbers, please see our recent Insight article.

In light of this higher inflation, did more S&P 500 companies comment on inflation than normal during their earnings conference calls for Q1? To answer this question, FactSet searched for the term “inflation” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through June 15.

Of these companies, 197 cited the term “inflation” during their earnings calls for the first quarter. This is the highest overall number of S&P 500 companies citing “inflation” on earnings calls going back to at least 2010 (using current index constituents going back in time). The previous record was 163, which occurred in Q2 2018. In addition, the first quarter marked the largest year-over-year increase (+138) in the number of S&P 500 companies citing “inflation” on quarterly earnings calls going back to at least 2010 as well.

At the sector level, the Industrials sector has the highest number of companies that cited “inflation” on earnings calls for Q1 2021 at 48, followed by the Consumer Discretionary (34) and Consumer Staples (26) sectors. However, the Consumer Staples (84%) and Materials (75%) sectors have the highest percentages of companies that cited “inflation” on their Q1 earnings calls from March 15 through June 15.

Given the unusually high number of S&P companies that discussed “inflation” on earnings calls for Q1, in what specific areas did these companies see higher inflation? Is this inflation having a negative impact on expected earnings and profit margins for the full year?

Consumer Staples

To answer the first question, FactSet looked in more detail into the comments made on inflation by the 26 companies in the Consumer Staples sector, as this sector had the highest percentage of companies that cited inflation on Q1 earnings calls. While many of these companies discussed broad-based inflation, higher transportation and freight costs were mentioned by the highest number of companies in conjunction with their comments on inflation, with over half of all of the companies (15 of 26) discussing these costs.

To answer the second question, FactSet looked in more detail at earnings guidance and EPS estimates for the current fiscal year for the 26 companies in the Consumer Staples sector that cited “inflation” on Q1 earnings calls. Of these 26 companies, 18 issued EPS guidance for FY 2021 or FY 2022. Of these 18 companies, 13 (72%) either issued EPS guidance above previous guidance or maintained previous EPS guidance for the current fiscal year. On the other hand, only three companies issued EPS guidance below previous guidance for the current fiscal year (the other two companies issued new FY 2022 EPS guidance with no comparison available). Overall, analysts have increased or maintained EPS estimates for the current fiscal year (relative to estimates on March 15) for 17 of these 26 companies (65%).

In aggregate, the estimated earnings growth rate for the Consumer Staples for CY 2021 is higher today (7.2%) compared to March 15 (5.2%). In addition, the estimated net profit margin for the Consumer Staples sector for CY 2021 is also slightly higher today (6.8%) compared to March 15 (6.7%). For the entire S&P 500, both the estimated earnings growth rate (34.8% vs. 24.9%) and estimated net profit margin (12.1% vs. 11.4%) are also higher today compared to March 15.

Thus, at least for companies in the Consumer Staples sector, it does not appear that higher inflation is having a negative impact on full-year earnings and net profit margins at this time. Overall, 18 of the 26 companies in this sector stated they had already increased prices or were willing to increase prices to help offset inflation. A number of companies also discussed lowering costs and improving productivity as ways to mitigate the impact of higher inflation on the bottom line.

For a list of the 18 companies in the S&P 500 Consumer Staples sector that have discussed price increases, please see the full FactSet Earnings Insight report at the link below.

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