Corporate America’s well-oiled earnings machine has been the backbone of virtually every bullish equity argument this year. It’s helped stocks power past the Federal Reserve’s hawkish pivot and each new variant of the coronavirus. But stubbornly high price pressures may end up forcing a rethink of those ever-increasing profitability predictions.

So goes the main bear case on U.S. stocks, which notes that after a steady climb since last year, 12-month estimates for the S&P 500’s operating margins have stalled out since mid-October. The plateau coincided with the start of an earnings season that saw companies sound the alarm on rising input costs and labor difficulties.

While enough companies were able to successfully pass along those costs to consumers, boosting index-level profit margins to all-time highs, the recent leveling in estimates could make a repeat performance difficult. While demand is robust, persistently high inflation will erode it, according to Bloomberg Intelligence’s Gina Martin Adams. It’s unclear whether shoppers will continue to be willing to pay higher prices, she said.

“Consumers are starting to get fed up with price increases and they’re starting to fight back, and we’re seeing that manifest itself in margins,” said Martin Adams, BI’s chief U.S. equity strategist. “Prices don’t rise as long as operating margin forecasts are falling.”

Signs that the American consumer is starting to buckle under the fastest pace of inflation in decades emerged last week. Data showed that purchases of goods and services, after adjusting for higher prices, were little changed in November. That stagnation in spending came in a month when real wage growth declined by 1.9%.

So far, inflation’s impact on the stock market has been ambiguous at best in a year when the S&P 500 is poised to close 27% higher. Despite supply-chain snarls and labor shortages, every sector has posted double-digits gains in 2021—helped by the fact that net-profit margins climbed across most major industries last quarter.

And Wall Street analysts aren’t fussed by the prospect of price pressures. They see S&P 500 profits climbing almost 9% next year to $220.40 a share. Still, even with that increase, the index trades at a forward price-earnings ratio of almost 22—very much at the high end of the historical range and a level that suggests riskiness should results fail to hit the mark.

The emergence of the omicron variant may make it difficult to pull off that lofty profits goal. While data indicate the strain is less deadly than predecessors, it has the potential to further exacerbate supply bottlenecks as countries fight to contain the spread, according to Richard Bernstein Advisors’s Dan Suzuki.

“It’s a pretty fragile supply chain as it is, just as we’re starting to see potentially some signs of relief. To see it continue, that’s definitely putting upward pressure on inflation,” said Suzuki, the firm’s deputy chief investment officer. “When the Fed has just recently started to have serious concerns about inflation, it’s clearly going to move the needle.”

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