Today’s high inflation is clearly eroding corporate results. From the second quarter of 2021 through the second quarter of this year, gross value-added of corporate business (in effect, corporate sales) rose 12.7% nominally but just 5.1% in real terms. After-tax corporate profits did worse, rising 7.4% but only 0.1% when corrected for inflation.
Inflation may have reached its peak, but will no doubt recede slowly. So, the 5% increase in S&P 500 earnings that Wall Street analysts forecast for 2022, as reported by S&P Global, will amount to a real decline. Investors, no doubt, will pierce the veil of inflation and shift their emphasis to the growing weakness in real corporate revenues and earnings. That, in part, may be behind the recent renewed sell-off in equities. My earlier forecast of a 40% total drop in the S&P 500 from the early January peak is still relevant.
Gary Shilling is president of A. Gary Shilling & Co., a consultancy. He is author, most recently, of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, and he may have a stake in the areas he writes about.