Important earnings week ahead for investors

While today (Easter Monday) is a bank holiday in many countries, it is also the start of a very busy earnings week - and many investors are waiting to see how higher inflation around the world has impacted net profit margins.

Many popular American companies are publishing their financial results this week, such as Bank of America, Charles Schwab Corp., Netflix, Johnson & Johnson, Halliburton, International Business Machines Corp., Procter & Gamble, American Express, AT&T,  American Airlines, United Airlines Holding Inc., and Tesla Inc. among others.

Other significant companies around the world are also publishing their earnings this week, like Rio Tinto Ltd., L’Oréal, BHP Billiton Ltd., Heineken, Danone, Carrefour, Kering, etc. To be sure you’re not missing earnings announcements that are important to you, remember that you can use an earnings calendar.

Net profit is expected to be impacted by higher prices

According to Factset’s earnings insight: S&P 500’s “companies are reporting earnings that are 7.5% above estimates, which is below the 5-year average of 8.9%.”

Many analysts are expecting to see a falling net profit margin this quarter for the 3rd quarter in a row, especially in the information/tech, real estate, financials, communication services, and consumer discretionary sectors.

One reason behind this fall is the impact of higher costs.

Recently, inflation has been on the rise, reaching record-level in many countries. The war between Ukraine and Russia has fueled the price rise, as it has sent commodity prices through the roof, especially energy and agricultural commodities, which has had a significant impact on inflation.

In the US, consumer prices increased 8.5% in March over the last 12 months, which is the largest 12-month jump since 1981, and producer prices rose 11.2% YoY in March, which represents the largest increase on record.

The first thing to understand is that when there is inflation, the purchasing power of a currency declines, which affects spending, saving, and investing decisions for all economic agents. Moreover, with very high inflation, interest rates are expected to go up, which also impacts these decisions because the cost of money is higher.

Usually, inflation is seen as negative for stocks because of higher borrowing costs, higher input costs, and a lower standard of living, as well as lower earnings growth expectations.

Still, inflation, when the economy is booming, is different from when inflation happens during economic hard times.

What should you focus on now?

At the end of the day, the impact of inflation on companies’ net margin mostly depends on their pricing power. If companies are able to pass on higher production costs to the prices paid by consumers, then it means that their consumers are willing to pay more.

Focusing on these companies will likely give you a chance for greater profits, as much as investing in leaders in their industry with a strong competitive advantage.

You can also focus on sectors that tend to do better within rising inflation and interest rate environments, such as value stocks in industries like health, financials, utilities, and consumer staples for instance.