Inflation – feared by investors – is showing in earnings. Here’s why it can be good news

Key Points
  • First-quarter earnings are rocketing, with gains double what was expected. One reason is that companies have pricing power to combat higher costs.
  • Inflation is showing up across different sectors and is coming broadly from raw materials costs, higher transportation rates and supply chain disruptions.
  • There are winners and losers from inflation, but the question is will it be a temporary or long term impact.
Shipping containers are unloaded from ships at a container terminal at the Port of Long Beach-Port of Los Angeles complex, amid the coronavirus disease (COVID-19) pandemic, in Los Angeles, California, April 7, 2021.
Lucy Nicholson | Reuters

Corporate profit growth so far is double what was expected in the first quarter, and one added boost for some companies may be the inflation that so many investors had feared.

Companies from Dow Inc to Harley-Davidson are reporting rising costs, but they also sold goods at higher prices in the first quarter. In many cases, that resulted in higher margins and profits.

"Obviously, there are going to be winners and losers, companies or sectors, that have historically been impacted or are more labor intensive like consumer discretionary. Those could be losers," Bank of America equity strategist Ohsung Kwon said.

Strategists have expected many companies to see net margins — the amount of profit generated as a percentage of revenue — expand because of firms' cost cutting and productivity changes during the pandemic.

Inflationary pressures have also been leading companies to raise prices. That can be a positive if costs are covered, but a negative if they aren't.

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