The Federal Reserve gave the clearest signal yet that rate hikes are coming in March as the central bank pivots to fighting high inflation
The Federal Reserve gave the clearest signal yet that rate hikes are coming in March as the central bank pivots to fighting high inflation AFP / Stefani Reynolds

For over a year, inflation was catching up with consumers.

In the last two quarters, inflation is also catching up with Wall Street firms. It is frequently mentioned in corporate transcripts. And it is having a mixed impact on Q1 profit margin estimates of the companies that are part of the S&P 500 index.

That's according to FactSet, which closely follows the financial reports of the S&P 500 companies and analyzes conference call transcripts to find out what management says about the market environment.

"Of these companies, 356 cited the term 'inflation' during their earnings calls for the fourth quarter, which is well above the five-year average of 144," said John Butters, vice president and senior earnings analyst at FactSet. "This is the highest number of S&P 500 companies citing 'inflation' on earnings calls going back to at least 2010 [using current index constituents going back in time].

"The previous record was 304, which occurred in the previous quarter [Q3 2021]. In addition, the fourth quarter marked the highest percentage of S&P 500 companies citing 'inflation' on quarterly earnings calls going back to at least 2010 at 74% [356 out of 482]."

The current inflation is primarily a food and energy problem. Its impact on consumers is clear. It makes the price of these two essential products in every household "basket" more expensive. Consequently, it diminishes the real value of the family budget.

For companies, the impact of inflation is less clear. It can affect them directly, through the production process, and indirectly through the demand side. In the industrial sector, which is a heavy energy user, inflation raises production costs, pressuring net profit margins.

That's why industrials have seen a downward revision in Q1 net earnings estimates on conference calls, from 8.8% in December to 7.9%.

Then there's the consumer discretionary sector, where inflation indirectly affects companies as higher food and energy prices leave less money for consumers to spend on discretionary items. The discretionary sector has seen a downward revision in net earnings margins estimates, from 6.6% in December to 6.3%.

Conversely, the technology sectors are light energy users and therefore are seeing no shortfall from inflation, maintaining earnings estimates.

And there is the energy sector, which has been benefiting from the higher oil prices. That's why energy companies have revised net profit estimates upward, from 9.4% on Dec. 31, to 10.3% today.

Wall Street has noticed.

The VanEck Vectors Oil Services ETF has gained 52% in the last three months, as the Dow Industrials lost close to 8% of its value. But the situation may change quickly once the Federal Reserve raises interest rates, and the Russia-Ukraine war comes to a conclusion.