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An analysis of more than 2,000 publicly traded companies outside the financial sector by the New York Times found that most of them increased sales faster than expenses; it was a remarkable achievement as the cost of wages, raw materials and components rose and supply chains were shaken.
As a result, profit margins, which measure how much money a business is making from each dollar of sales, are well above the pre-pandemic average. Overall, companies generated an estimated $200 billion in additional operating profits last year due to this increase in margins.
The unexpected drop boosted stocks in a wave of market enthusiasm, but potentially beyond what business fundamentals deserve. For all companies in the S&P 500, the price-to-earnings ratio, an indicator of how much investors are paying for each dollar of company profits, rose to 23 at its peak, from an average of 18 for the previous decade. Pandemic. At such a high price-to-earnings ratio, stock prices were particularly vulnerable to a sell-off.
And now there are good reasons for investors to worry about profits. Many federal stimulus programs created during the pandemic have ended or are coming to an end. The Fed is raising interest rates. And company executives are warning that supply chain issues that could have helped boost their profits over the past year are becoming a burden.
Deere, a manufacturer of agriculture, construction, horticultural and other equipment, said material costs were still rising and were delaying sales due to a lack of parts to complete certain products. Cisco, which makes computer networking equipment, also complained that it couldn’t get some components.
Of particular concern to investors are signs that demand for some goods and services is flattening or even falling. Walmart noted that higher food costs are reducing demand for other products. And while Target expects demand for things like clothing and household goods to decline as the impact of government incentives wanes, the company’s CEO Brian Cornell said the company “did not estimate the magnitude of this change.”
Shares of clothing retailer Gap fell sharply last week after it announced disappointing earnings for the first three months of the year, as well as a more pessimistic outlook for the remainder of 2022. Sales of the Old Navy brand, which tends to appeal to low-income consumers as it carries lower-priced goods than Gap stores.
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