That’s in line with warnings from the world’s largest retailer, Walmart Inc., that soaring inflation is forcing shoppers to pay more for essentials at the expense of other discretionary items. A cutback in consumer spending would impose a clear drag on profits posted by S&P 500 companies, which are also grappling with higher wages, rising inventories and continued supply-chain problems in China.
While the S&P 500’s margins peaked a year ago, the trough may not come until the fourth quarter, according to Bloomberg Intelligence. Consensus estimates for net-income margins have fallen about a half percentage point for both the third and fourth quarters since the start of this earnings season, with communication services, health care and consumer sectors among the weakest groups, BI data show.
Pulse contributors also reckon unemployment is likely to rise above 4% but not higher than 6% -- a worrisome level that's higher than what policy makers are anticipating but lower than in previous severe economic downturns. That offers some comfort that any recession would be short lived, providing a dip-buying opportunity for risk assets.
“It’s rare for the Fed to aggressively tighten policy without causing market volatility,” said John Cunnison, chief investment officer at Baker Boyer Bank. “Stocks aren’t wildly cheap right now, but they're not as expensive as they were six months ago, especially growth companies.”
--With assistance from Lu Wang, Brendan Case and Tomoko Yamazaki.
This article was provided by Bloomberg News.