As the Federal Reserve's efforts to curb inflation through interest rate hikes seem to be paying off, corporate America is still expressing deep concerns about price pressures. A recent analysis by Bloomberg Intelligence (BI) of earnings call transcripts this reporting cycle reveals that sentiment around inflation among corporate managers has reached levels last seen in early 2021. Anxiety regarding labor costs is also mounting, giving Wall Street analysts covering companies further cause for worry.
While the BI analysis does not necessarily indicate that inflation is as significant of an issue as it was two years ago, it does reflect the frustration felt by executives over stubborn price pressures and wage costs that are squeezing margins. Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, suggests that there may be residual worries stemming from the fact that inflation hasn't abated as quickly as anticipated, resulting in the Fed maintaining tighter monetary policy for a longer duration. Additionally, the frustration may stem from the fact that once prices rise, they tend to remain elevated even if inflation subsides.
The study from BI, which covers earnings reports for approximately half of the S&P 500 companies, sheds light on why Federal Reserve officials recently signaled that they are not ready to declare an end to their tightening campaign. While executives' outlooks are not overwhelmingly negative, they are becoming less optimistic about consumer prices. The recent uptick in consumer inflation since mid-year adds pressure on policymakers and may explain the somber sentiment expressed during conference calls.
Ann Miletti, head of active equity at Allspring Global Investments, suggests that the Fed is likely more concerned about keeping inflation under control than the risk of a recession. Corporations, on the other hand, are struggling to foresee upcoming challenges due to limited visibility, leading them to focus on managing their businesses based on short-term expectations.
The BI analysis also indicates weakening sentiment surrounding wage costs, which is reflected in share prices. According to data compiled by Goldman Sachs Group Inc., a basket of S&P 500 Index stocks with higher labor costs trailed its lower-cost counterpart by 3.9 percentage points in the last quarter, the largest lag since early 2021. Gillian Wolff, an equity strategist at BI, suggests that rising costs overall, particularly labor costs, are increasingly raising concerns among executives.
Market observers eagerly await next week's release of the consumer price index (CPI) for fresh insights into inflation. Economists surveyed by Bloomberg anticipate a slower rise in October, with the CPI expected to increase at a 3.3% annual pace compared to September's 3.7%. Additionally, earnings reports from retail giants like Walmart Inc., Target Corp., and Ross Stores Inc. will provide updates on how consumers are coping with rising prices and increased borrowing costs, especially heading into the year-end holiday shopping season.
Goldman Sachs strategists, including Dominic Wilson, emphasize that the risks are now becoming more balanced. The risks of inflation persisting above the central bank's target are weighed against the possibility of weaker economic activity. This shift highlights the delicate balance that policymakers must strike amid ongoing concerns about inflation and its impact on businesses and consumers alike.