If you were wondering what corporate management teams discussed on calls during reporting season…
Wait, let me start over. You probably weren’t “wondering.” Even passive market observers (often synonymous with passive investors) could likely make a list of hot topics for management in the current environment. There’s no mystery when it comes to what’s on the minds of the C-suite.
And yet, it’s worth recapping now that some 85% of S&P 500 market cap has reported.
According to Goldman’s “S&P 500 Beige Book” (essentially a compendium of key themes gleaned from conference call transcripts), “the word on everyone’s lips” during Q1 was “inflation.”
It’s not hard to understand why. Various PMI prices paid gauges almost uniformly suggest input prices are spiraling out of control. By now, you can likely sketch a reasonably accurate chart of commodities prices from memory, considering how many headlines revolve around rising raw materials costs these days.
“Input costs have risen increasingly sharply in recent months for manufacturing and services firms,” Goldman said, adding that “rising costs are particularly noticeable upstream in the supply chain, with PPI raw materials costs up 9% in March, compared with just a 1% rise in the finished goods component.”
The bank sees commodities rallying another 13% in the next six months. For now, margins are expanding. The question is how management will deal with the situation going forward.
While some companies are “prioritiz[ing] cost-management strategies,” Goldman noted the obvious: “Many firms are relying on price increases to combat inflation” and protect margins.
When you consider the distinct possibility that labor costs will rise going forward, it’s reasonable to expect consumers will end up footing at least part of the bill.
Although Janet Yellen on Friday suggested that robust hiring in leisure and hospitality was evidence that enhanced unemployment benefits and stimulus checks weren’t the primary cause of April’s jobs miss, conference calls found management discussing labor shortages, “particularly in transportation and hospitality,” Goldman noted.
The bank expects job gains of more than six million by the end of 2021, due in large part to the rehiring of “low-wage workers in hard-hit industries.” Fingers crossed.
Not surprisingly, Goldman is generally on board with the idea that price pressures and inflation will prove somewhat fleeting.
“Our economists expect the most noticeable cost increases will be caused by near-term disruptions to supply chains and should not persist into 2022,” the bank said. When it comes to management, Goldman noted that “companies’ expectations about the timing of inflationary risk varies.”
But don’t worry too much if you’re a shareholder. After all, there’s always buybacks, which were a hot topic during earnings calls too.
“According to the GS buyback desk, buyback authorizations have surged YTD, which is evident in management discussions,” Goldman said.
The bank called it a “bonanza.”