Uncertain Market And Surging Inflation – What To Expect This Earnings Season?

COVID-19 still has a chokehold on many economies even though many of them are open, and businesses are operating at full capacity.

The surging inflation has gripped many places, compounding uncertainty all over, which is out to affect company results during the earnings season this year.

The surging inflation going past previous highs set in a decade started hammering economies due to supply issues at the height of COVID-19. Partial and full closure of businesses affected the supply of some goods and services globally. The situation might affect positive expectations during earnings season.

After opening, many economies witnessed a sudden surge in demand for goods and services, pushing up prices.

Tension in Eastern Europe is also to blame for the rise in energy prices because Russia is an important energy supplier to Europe and many other areas in the world.

How Does Inflation Influence the Earnings Season

Historically, high inflation has dampened the mood to take new positions in the stock market. Inflation is a limiter to growth, meaning that stocks have little returns compared to other times when prices are normal.

The central banks are a major reason why the stock market plummets during periods of high inflation, as they force investors to dump risky instruments and rush to safe havens like gold. In the USA, the Federal Reserve has acted to curb the rising inflation, spiraling out of control by raising the interest rates. The US economy is expecting the interest rates to hit over 1 percent by the end of the year, as plans are out to have about seven additional hikes gradually while the year pans out.

Higher interests discourage investments because it is harder to pay back loans. Another effect of high interest is slower economic growth due to reduced profits. A tank in profit is caused by the high cost of borrowing, supposed to spur growth.

The upcoming earnings season, at the end of April, will highlight that uncertainty during periods of high inflation reduces the appetite for risky stocks. When stocks become too hot to handle, firms issuing them take a huge hit in terms of earnings and profitability.

However, firms with consistently good performances notice a significant hike in the price of their shares, as many investors want to reduce risk in their trading portfolios. Government bonds and physical assets like gold also peak in times of uncertainty, as they are the safest options to handle during turmoil.

Therefore, it will be a mixed bag of performance in the latest earnings season.

Bonds vs. Shares—What to Hold Amid Rising Inflation

Business earnings in the period of inflation take a significant hit, affecting share issuance, but the period is also suitable for bond purchase. Normal times in the economy spell for interest rates close to 0 percent, making shares unattractive to hold over government bonds.

Almost zero interest rates make dividend payments an attractive option for investors in ordinary times. On the other hand, many investors do not fancy bond returns compounded by almost zero percent interest rates.

With interest rates rising due to inflation, backed by central banks, bond holding becomes profitable. Share prices take a hit due to the exodus to bond holding and less risky assets.

How Startups Cope

Most startups in the growth phase often take a hit when the cost of borrowing increases. Inflation influences revenue projections set for new companies. Profits might enter the negative territories for the companies during inflation.

Many companies projected to make their first profits in 2021 and 2022 have suffered negative profits due to inflation.

Those expecting dividend payouts this year must wait longer for returns. Additionally, the share prices of those companies have taken a hit due to inflation, making them unattractive to new investors, further limiting the growth potential of the companies.

Conclusion

Companies often take a hit significantly from spiraling inflation that reflects during the earnings season. Increments in commodity goods and steps to control the increments heighten volatility. Therefore, investors react by investing more in bonds to take advantage of higher interest rates or enter a buying frenzy for less risky investments.