Caleb Silver, Editor in Chief at Investopedia, breaks down which industries have the most pricing power and how rising inflation may impact margins in this upcoming corporate earnings release. "They have pricing power, no doubt about it, and consumers were feeling pretty flush last year, by and large, the personal savings rate in 2021 hit an all-time high, the personal income levels hit an all time high," he said. "Why? We had a lot of government money coming to consumers via those checks. So there was part of that, and we weren't spending in the first half of the year like we wanted to."

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Corporate Profits Hit Record High in 2021 Despite Supply Chain Disruptions  

to discuss is Caleb silver editor in chief at investopedia. Caleb, let's just start with kind of the fundamentals in the background of this picture, what factors contributed to the growth in corporate profits last year? Good to be with you and really strong profit margin. Check this out every quarter had profit margins of 13% or more. We've never, ever seen that before in the S&P 500. So companies had pricing power, consumers were spending, we hadn't spent a lot of the prior year. We had a lot of money banked from those government handouts, those government stimulus checks and there was a lot of demand. So companies were able to bank big profits last year. Apple alone, $95 billion Amazon $32 billion dollars in net profit. Two of the biggest companies out there, they were able to really hold on to a lot of those net gains as you mentioned, but companies across the board were able to do that as well. I find this fascinating amid the backdrop of if we were if we reflect last year, I'm sure you kind of follow the earnings reports as I do here in the headlines around a lot of these companies and so many of them concerned had elevated concerns around inflation around the commodity prices, where material prices going up kind of, you know, I would say crying a bit about that. And then you look at their profits and you see 30% profits historic for many of these companies, what does that say in terms of, you know, how companies passed along, many companies passed along the inflationary pressures, they were feeling to the consumer, but then maybe a bit of a buffer on top of that as well. Yeah, they have pricing power, no doubt about it. And consumers were feeling pretty flush last year by and large, the personal savings rate in 2021 hit an all time high, the personal income levels hit an all time high. Why we had a lot of government money coming to consumers via those checks. So there was part of that and we weren't spending in the first half of the year like we wanted to. So you had a lot of pent up demand credit card balances were generally very low. It was a record year for four oh one K. So yeah, passing those prices along to consumers and they flagged it. Starbucks just did it recently, amazon Prime raised its uh its membership costs, netflix is raising it. So they have the pricing power. They know consumers are willing to take it so far and they're going to continue to do that so they can keep delivering these profit margins because why that's what investors are looking for profit growth going out quarter after quarter. Yeah. And to your point there, you know, Starbucks, obviously raising their prices again in january after raising it already in october and some of the other big names you mentioned there, but I think the biggest question is for how long will some of these companies enjoy the pricing power because at some point, the consumer appetite, if there ever was an appetite to pay higher prices, Um that has to kind of pull down a little bit and you look at like seven S. and p 500 sectors that have lowered kind of earning estimates since December. I think kind of signaling may be a concern around that appetite to absorb these prices. Could there be a profit slowdown, you know, at least in the near term, if not longer term. Oh absolutely. And it's coming right up in this next quarter when the last quarter's earnings are going to show us that profits slowed greatly last year, we're expecting estimated earnings growth for the S. And P 500 of 4.7%. That would be the lowest rate of growth since the fourth quarter of 2020. In the fourth quarter of 2020 was terrible. This is not terrible earnings growth by any means, but the slowdown is significant given where we've been the forward P. E ratio though, still for the S. And P. 500 is 19.5, the five year average 18.6, what does that tell you, profits are still pretty high? And prices for stocks in some sectors are still pretty high too. But you mentioned those sectors lowering guidance. Those are communications sectors. That some of the discretionary spending sectors, you know, who's raising guidance, oil and energy stocks. So it's a tale of two markets right now? And another part of the picture here is right, kind of the concerns of the bottom line, that's kind of what I was saying about last year, we saw a lot of the concerns in terms of, you know, rising wages, obviously commodity raw material prices were still seeing companies talk about and signal those same concerns right now, you know, with, with wages still kind of going up, albeit you know, 4.7% a lot less than their profit margins. Right? And even a lot less than inflation, do you see kind of, these increases affecting earnings this quarter, more substantially than previous quarters, when again, previous quarters, these were mentioned as possible headwinds, but truly when you look at margins, they didn't really impact it all that much. Well you follow this just like I do and you know, the little game companies like to play guide low and then blow out the earnings when you deliver a report, hope for a little stock bounce right there. So there's a little bit of that game going on right now. But also there is, you know, questions about the resiliency of consumers, consumer sentiments at a 10 year low. Consumer spending slowed last court last month for the first time in a few months, I was waiting for it to slow a long time ago. So that's starting to wane a little bit, but it hasn't broken yet. Companies are still planning to spend heavily this year, but those higher input costs are going to be a factor. Can they continue to pass them along? That's the big question out there. We're still gonna see pretty robust gains in some sectors, especially energy, especially in some transport sectors. But if you look at the sectors that did great in 2021 they're not gonna have as good a year this year to that end. You know, I almost like a broken record. The number of times I have said, the consumer can only take so much, the consumer can only take so much and then the consumer just continues to take it. I think it points the argument, even the Feds saying the consumer is relatively healthy. It's just fascinating to follow kind of that so called healthy consumer amid these higher inflationary, you know, prices that we were seeing. Do you think though, maybe this quarter is the quarter where I'm no longer a broken record here. Um, but the pace of spending is sustainable and that we could see a stronger kind of pull back with the consumer given continuous kind of rising inflation. Yeah, two factors to watch their energy prices, especially gas prices, even though that's about 14% of our end of our monthly spending as a household. If those continue to go up, it's gonna be tougher for consumers to buy the discretionary things they want and we're in a rising rate environment. So new car purchases, a lot of those rates are tied to the Fed funds rate, home purchases obviously tied loosely to the Fed funds rate Credit card balances tied loosely to the Fed funds rate as rates go up and if we have continued high energy prices, I know consumer spending is going too slow for how long, who knows? But consumers may be tapped out and that could be a bad sign for corporate profits going through 2022. But I do expect there's still to be some growth because the economy is healthier than it was a year ago in a big way. Yeah, Caleb really appreciate your insight here. This is one of those stories that I've been following last week or so when this kind of data came out, just fascinated with the picture that we noted a few moments ago in terms of just how much, you know, companies were concerned about inflationary pressures, wages being higher and then kind of get this record 2021 year um even amid the supply chain issues and a lot of things happening, Caleb really appreciate your insight. Caleb silver editor in chief at investopedia