over 1 year ago • 2 mins
It’s almost earnings season, and you’re going to want to brace yourself for another quarter of profit warnings. If previous economic downturns are anything to go by, profitability is going to be an issue.
Earnings reports for the first half of the year weren’t disastrous: in fact, US companies managed to actually grow their earnings per share (EPS), albeit barely, at just 0.3%. But that may not hold: data from past recessions in 2000-01, 2008-09, and 2015-16 all show the same thing: in a downturn, margins are the biggest drag on earnings growth. And that’s true today: soaring costs (i.e. inflation) are squeezing profit margins even as revenues grow. Sure, it’d be easy to believe all is fine because revenues are up 9.1% compared to the 20-year average of 3.8%. But most of that increase is price-driven, as companies charge more for their goods and services, in an attempt to offset inflation.
The squeeze on margins is probably far from over. The weakness in profitability we’ve seen so far is only a fraction of what we saw during past recessions. And that’s not even factoring in today’s persistently high inflation and rising interest rates, both of which could deliver a further hit to demand, hurting revenues and squeezing those margins even more. Businesses tend to have fixed costs, after all, which would then need to be spread over a smaller amount of goods sold, meaning that profitability will be lower.
With all this in mind, it might not be time to buy the stock market dip just yet. But you could consider buying stocks with low volatility or in defensive industries. The iShares Edge MSCI Min Vol USA ETF (ticker: USMV; expense ratio: 0.15%) or the Invesco S&P 500 High Div Low Vol ETF (SPHD; 0.3%) can provide you with easy ways to avoid the uncertainty of the coming earnings season.
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