After the COVID-induced selloff in March 2020, the US equity market has climbed strongly and steadily to new highs. For the whole of 2021, this has been earnings-driven, rather than multiple expansion. Certainly, the economy has rebounded. But in addition, behind the scenes, PROFIT MARGINS are running at record highs! It appears that the pandemic and lockdowns have driven significant cost-cutting and technology-led efficiency gains.
What does this mean? Firstly, companies can afford to pay higher wages and input costs and this doesn’t have to feed through to consumers. So perhaps this really will be the “good” type of inflation. Secondly, with strong earnings, no multiple expansion this year and possibly good inflation headlines, the medium-term outlook for US markets is rosy. Keep an eye out for a jump in productivity figures.
Inflation continues to drive recession worries. US inflation continues to drive recession worries with CPI running at 8.6% YoY in May.
Inflation out of control? You might expect to see an inflation chart like this in an emerging market, but this is happening in the 5th largest economy in the world.
The almighty (and confusing) US consumer. US economic health is intricately tied to consumer behaviour with personal consumption accounting for ~70% of GDP. Predicting whether or not Americans will keep opening their wallets for a new car, a night at a restaurant or a nice vacation has far reaching implications.