Inflation threatens the US earnings boom

A 6.5% rate of GDP growth would usually merit “celebrations in the streets”, says Neil Irwin in The New York Times. Yet America’s second-quarter 6.5% annualised growth disappointed: it was lower than predicted and showed that the recovery is running into “obstacles”.

Shortages of building materials meant that the housing sector “actually contracted” slightly despite huge demand. Getting back to normal is proving a “grind”; consumption of services is still 7.4% below where you would have predicted it to be pre-pandemic, while “spending on durable goods”, which boomed during lockdowns, is 34% higher. Rising cases of the Delta variant in America could also sap the recovery. Investors are recalibrating.

As Nicholas Colas of DataTrek Research tells CNBC, all the “Big Tech companies” have reported unexpectedly good second-quarter earnings. Yet traders reacted by selling off most of them. Investors are worried that its pandemic sales boom will run out of steam. The concern is that we have reached peak earnings growth. “We’ve seen so much demand for tech... over the last year. Can it keep going?”. Corporate margins will be key, says Gina Martin Adams on Bloomberg. “Defined as earnings before interest and taxes divided by sales,” US operating margins are set to rise to a very healthy 16.7% over the next year. Yet spikes in inflation mean some are nervous.

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Analysts have “cut their margin estimates for a quarter of S&P 500 members in the last three months”. Margin trends have historically been a “strong leading indicator of stock-price direction”. For now the margin pressure is concentrated in a few sectors, such as “healthcare, utilities and consumer staples”. If it spreads that could presage a stockmarket rout.