Watching the right scoreboard

The economy is showing us a lot of numbers right now but we are focusing on corporate earnings reports as the only real read we can rely on. Jobs, inflation, and growth reports land late, lean on fraying survey methods, and get revised after the market has already moved on them. Government data, including from the Fed, is failing to provide a timely or reliable picture of what is happening in the economy right now. We are questioning whether the official numbers are timely or reliable enough to act on. Inflation is showing up in corporate costs and margins in a way that headline numbers are not capturing.

We instead point to corporate earnings, which reflect what companies have sold, what they charged, and what is happening to their costs. The corporate reports provide a proper sense of real demand and pricing power, and the most direct view on how inflation is affecting the economy. Fittingly, this morning brought news of Alan Greenspan's passing at 100 years old. The man who gave us "irrational exuberance" spent two decades reminding markets that sentiment and fundamentals are different things. We are trying to stay on the fundamentals side of that line and are wary of what the headlines are saying.

Look past the Magnificent Seven

Within the corporate reports, we are looking past the Mag 7 to get a sense of how inflation is showing up. The large majority of household and business spending is happening outside of that group, and we know (as it’s been widely reported) that a good share of the revenue inside the AI complex reflects circular financing. To understand where the broader economy is heading, we turn to the other, roughly four hundred ninety-three, names in the S&P 500 for signals.

Margins are doing the talking

When we run the full S&P 500, the clearest pattern is margin compression. Operating margins contracted over the trailing four quarters for roughly three out of four companies, and the pressure shows up in every single sector, from Technology and Utilities down through Staples and Real Estate. Compression this broad generally means costs are climbing faster than companies can pass them along to customers. SG&A expenses are up twelve percent over the last four quarters and input costs are up nine percent. Financial engineering can soften the problem for some time but it does not fix it. If the pattern holds, we think it is reasonable to expect earnings growth to feel the strain over the next couple of quarters.

Our focus stays on margins, breadth, and earnings revisions, and we are positioning accordingly.

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By Stephen Evans, CFA

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The data that we’re currently gonna get from the BLS the census beurewa the fed is now going to be immasculated that wd’re not gonna get accurate data from them; so we need to get it somewhere else.

Why is the official inflation stat not matching what is being realized by corporate America. It doesn’t seem to be matching what s happening in the corporate world and there are other factors that reflect the true state of inflation