Rising Costs Can’t Stop Corporate Profits From Climbing

Third Quarter Profits Should Be in the Clear

Rising prices, supply-chain bottlenecks, and labor shortages are making it tougher to run businesses. However, these factors have not impacted corporate profits—at least not yet.

Now that the third quarter has come to a close, corporations will begin reporting their results for the three-month period. Wall Street analysts are optimistic heading into earnings season, projecting earnings per share to be up 29.9% year-over-year for S&P 500 companies. On a sequential basis, earnings are projected to decline 7%, reflecting more normal conditions. Actual results annually and month-over-month may end up being better, as analysts tend to be conservative with their forecasts.

Consumers Willing to Pay More

Given the supply-chain issues which are making it more expensive to conduct business, it is not surprising analysts are cautious about third-quarter earnings growth. But based on economic data, companies appear to be taking the increased expenses in stride.

In August, the Labor Department reported that wholesale prices for finished consumer goods increased 4.7% year-over-year, marking the biggest increase in more than 10 years. Prices consumers paid for goods jumped 7.6% last month. While the two data points are not an apples-to-apples comparison, they do indicate that consumers are willing to pay the increased costs which companies are passing on.

Wage Increases Do Not Hurt Profits

Even rising wages are not expected to hurt corporate profits in the third quarter. For the first two months of the just-ended quarter, wages rose 1.8% compared to the second quarter. That is slower than the pace of economic growth and inflation. Wages are also growing at a slower pace than the increases in prices which S&P companies are charging their customers. This is making things difficult for workers, but for now it means that profits for companies are staying elevated.

Still, not every company will be able to keep prices high, especially those in price-sensitive industries. For now, corporate profits seem immune to supply-chain woes and labor shortages. It will be interesting to see what corporations have to say about the past quarter and about fourth-quarter outlook when they begin reporting earnings.

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