Inflation Fears Wane on Q1 Earnings Calls

Inflation, once the boogeyman lurking in every boardroom, is now losing its fright factor among corporate titans. This trend bodes well for the economy and equity markets.

As U.S. consumer inflation continues its downward trajectory, there has been a noticeable decrease in the number of S&P 500 companies discussing inflation during their first-quarter earnings conference calls compared to previous quarters.

Research firm FactSet unearthed this dynamic, by utilizing its Document Search, an artificial intelligence-powered tool designed for searching keywords or phrases across various document types.

Of course, this shift in C-Suite mentality is getting ignored by the mainstream financial media. The topic is too “wonky” to sustain ratings. (Entertainment-driven CNBC has about as much depth as the Disney Channel.) But this FactSet data, while ostensibly obscure, is vital for investors to know. Let’s dig deeper.

FactSet searched for the term “inflation” within the conference call transcripts of all S&P 500 companies that held earnings calls from March 15 to May 17.

The findings revealed that 219 companies mentioned “inflation” during their first-quarter earnings calls with analysts. This represents the lowest count of S&P 500 companies referencing inflation since the second quarter of 2021, which had 218 mentions (see chart).

Keep in mind, about 30 S&P 500 companies have yet to report their earnings for the first quarter. Consequently, the final count of companies mentioning “inflation” is expected to exceed 219 but not surpass the 285 companies from the previous quarter.

Among these 219 companies, the average frequency of “inflation” mentions was four, while the median frequency was two.

The financials (49) and industrials (43) sectors had the highest number of companies citing inflation in their earnings calls for the first quarter.

A sign of economic transition…

The diminishing fear of inflation among the corporate elite is not merely a linguistic change but a harbinger of significant economic and market transformations.

For the past few years, inflation has been a persistent topic in earnings calls. CEOs and CFOs frequently cited rising costs, supply chain disruptions, and wage pressures as key challenges. Analysts, in turn, peppered them with questions about price strategies, margin pressures, and cost-cutting measures. Inflation was the villain in the narrative of many a company’s financial story.

However, as I’ve noted above, the latest earnings calls reveal a different script. The once-dominant topic of inflation is now mentioned less frequently. FactSet also has discovered that when inflation is mentioned, it typically carries a more subdued tone. The sharp edge of urgency is gone, replaced by a cautious optimism. This change in discourse is more than a passing trend; it is a signal of deeper economic currents at play.

Several factors contribute to this development, each with far-reaching implications. After a period of sharp increases, many costs are leveling off. Supply chain disruptions are easing, commodity prices are finding equilibrium, and wage growth, while still present, is becoming more predictable. This stabilization allows companies to plan more effectively and reduces the uncertainty that inflation brings.

Central banks around the world have been aggressive in combating inflation through interest rate hikes and other monetary policies. These measures are beginning to bear fruit, leading to a more controlled inflation environment. Corporate managers are responding to this new reality, shifting their focus to other pressing issues such as growth strategies and innovation.

As inflation fears recede, consumer behavior also is adjusting. Households that had been tightening their belts in anticipation of continued price hikes are starting to spend more freely. This shift in consumer sentiment is a positive portent for demand across various sectors, potentially boosting corporate revenues and profits.

The stock market, a barometer of economic sentiment, also is reacting to the diminished focus on inflation.

When inflation fears subside, the pressure on profit margins eases. Companies no longer need to raise prices aggressively or cut costs drastically, leading to healthier balance sheets. Investors, sensing a more stable environment, are willing to pay higher prices for stocks, driving up market valuations.

Different sectors perform better under varying inflation scenarios. High inflation typically benefits commodity-based sectors such as energy and materials, while low inflation is favorable for growth-oriented sectors such as technology and consumer discretionary. As inflation concerns wane, there is likely to be a rotation from inflation-sensitive stocks to growth stocks, reflecting the market’s adjusted expectations.

Lower inflation diminishes the risk of economic overheating and severe monetary tightening. This reduction in systemic risk increases investors’ appetite for riskier assets, such as stocks, particularly in emerging markets and innovative sectors. This shift should lead to a more robust and diversified market rally.

With inflation fears abating, investors are returning their attention to fundamentals such as earnings growth, technological advancements, and market expansions. This change in focus should usher in a more balanced and resilient bull market, characterized by diversified growth across sectors and regions.

The main U.S. stock market indices closed mostly higher on Tuesday as follows:

  • DJIA: +0.17%
  • S&P 500: +0.25%
  • NASDAQ: +0.22%
  • Russell 2000: -0.20%

The benchmark 30-year U.S. Treasury yield slipped 0.42% to settle at 4.55%, yet another indication that inflation fears are diminishing.

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John Persinos is the editorial director of Investing Daily.

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