After a Bumper 2021, Companies Might Struggle to Increase Profits

A New York Times analysis of more than 2,000 publicly traded companies outside the financial sector found that most of them grew sales faster than costs, while wages, raw materials and components prices rose and the supply chain slowed. Was a remarkable achievement.

As a result, profit margins, which measure how much money a business earns per dollar of sales, have outperformed the epidemic average. Overall, the increase in margins led companies to make an additional operating profit of about $ 200 billion last year.

The windfall caused the stock market to bounce back, but possibly beyond the business fundamentals that are appropriate. The cost-to-earnings ratio – an indicator of how much investors are paying for every dollar of corporate profits – peaked at 23 for all companies in the S&P 500, compared to an average of 18 in the previous decade. Nationwide epidemic. At such an elevated price-to-earnings ratio, stock prices were particularly sensitive to sell-offs.

And now there are good reasons for investors to worry about profits. Many federal stimulus programs created during the epidemic have ended or are coming to an end. The Fed is raising interest rates. And corporate executives are warning that supply chain problems, which may have helped them boost profits last year, have become a burden.

Deere, a manufacturer of agriculture, construction, horticulture and other equipment, said material prices were still rising, and it lacked parts to complete certain products, causing delays in sales. Cisco, which makes computer networking tools, also failed to get specific components.

Of particular concern to investors are signs that demand for certain goods and services is flat or declining. Walmart noted that higher food prices appear to have reduced demand for other items. And while Target expects demand for items such as clothing and household items to decline as government stimulus ceases, the company “did not expect that shift to intensify,” said its chief executive, Brian Cornell.

Shares for the clothing retailer Gap fell sharply last week after revealing disappointing earnings for the first three months of the year as well as a more pessimistic outlook for its profits for the rest of 2022. Sales for its Old Navy brand, which attracts low-income customers because it carries goods at lower prices than Gap stores.

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