Morgan Stanley analysts analyzed 400 firms’ feedback on prices in second quarter earnings transcripts. “Compensation, commodity, and transportation prices have been talked about most continuously…Tariffs got here up much less typically and have been constantly mentioned in a ‘wait and see’ framework. 45% of S&P 500 firms talked about a minimum of one price headwind, and information exhibits that this pattern has been on the rise.”
Supply: Morgan Stanley
In a be aware titled, ‘No margin for error,’ Wilson stated firms are optimistic that they will cross on larger prices. “In line with consensus, 2019 would be the third consecutive yr of margin enlargement on the benchmark stage,” notes Wilson. “We discover that onerous to consider. Margin estimates for the next calendar yr are sometimes revised decrease over time, however the decline in 2019 estimates has been comparatively modest to this point in 2018 (-Zero.7% from January via September vs. the 7-year common of -1.7%).”
Based mostly on Morgan Stanley’s examine, firms within the transportation sector, tech and client discretionary have been discovered to have excessive revenue margin danger but additionally have had optimistic expectations and valuations. However, firms within the meals sector, beverage and tobacco and a few well being care firms have low margin danger and comparatively pessimistic expectations—a way more optimistic mixture for traders.
“When inflation expectations are rising, issues like vitality, financials, supplies outperform and development areas of the market, like tech, client discretionary and the brand new communications companies underperform,” Calvasina stated.
Topping Morgan Stanley’s checklist of margin issues are rising wages, with common hourly earnings development anticipated to rise by Morgan economists to three.three % subsequent yr from 2.eight % at the moment. Different components embody anticipated beneficial properties in vitality and different commodities costs; freight price inflation, and better rates of interest. The prices from the rising U.S.- China commerce battle haven’t been priced in and the influence remains to be unclear.
Comparable issues fear Calvasina.
“We have been fearful in regards to the reporting season. We did not count on this technical unwind” in shares, she stated. “However we felt we have been the place the market should be, at its latest highs…we have been actually simply telling individuals to not chase. We have been telling individuals there could be a greater entry level.”
Morgan Stanley expects earnings development of simply 5 % subsequent yr, simply half of Wall Avenue’s consensus of 10 %. This yr, analysts count on earnings to develop by 23 %, based on Thomson Reuters.