Investors To Focus On Pre-Tax Margins
Growing prices and wages started reflecting squeezing profit margins in the US, which made investors punish firms which show worse results. Goldman Sachs Group Inc reported that in 2018, share prices of businesses with high operating leverage increased 15%. Also, companies with high and sustained gross profit margins have been repeatedly praised by investors.
However, the impact of US corporate tax cut demands more spending and 10 years of ultra-low interest rates have boosted growth and raised prices and wages. The reform stimulated a large number of corporate profits and allowed companies to spend on talent and market share, sometimes increasing expenses.
And now investors want to focus on pre-tax margins. Tom Dorsey (co-founder of Dorsey, Wright & Associates LLC) claimed that today's market dynamics are similar to those in the mid-1970s when he started in the investment business. U.S. inflation skyrocketed during that decade and oil prices were decisively growing. "The same kind of thing is beginning to happen," he stated, adding that : “Investors could easily lose a lot of equity in stocks they want to hold on to because of (their dividends)."
According to the Labor Department, US headline consumer price inflation was 2.5% higher yoy in May and hourly earnings for private sector employees rose 2.7%, comparing to 2017. Fed admitted gradual price rises in most regions of the nation and pointed at increasing materials costs in some districts that are putting pressure on transportation, construction and manufacturing. The Central Bank is expected to execute a rate hike next week.
Charles Bobrinskoy (vice chairman and head of investment group at Ariel Investments) urged: "Everyone is focused on interest rates. Everyone is focused on trade. But the risk everybody isn't paying attention to is inflation,” And: "There's a large class of investors who have never invested in inflationary environments."