NEW YORK (Reuters) - For years U.S. inflation has been the dog that did not bark, but rising prices and wages are now showing signs of squeezing profit margins across corporate America, leading investors to punish companies whose results are deteriorating.
Investors have long focused on rewarding companies that can multiply sales in a relatively slow-growth U.S. economy like Netflix Inc (NFLX.O) and Amazon.com Inc (AMZN.O), but they are now paying more attention to figures further down the income statement like expenses and pre-tax margins.
So far this year companies with high operating leverage, which allows rising revenue to boost earnings while costs stay low, have seen their share prices rise 15 percent, beating their peers by nearly 6 percentage points, according to Goldman Sachs Group Inc (GS.N) data.
Investors have also been rewarding companies with high and stable gross profit margins, according to the data.
But a shift in investor focus may now be occurring as the impact of U.S. corporate tax cuts encourages more spending and 10 years of ultra-low interest rates have stimulated economic growth and finally begun to push up prices and wages.
Large corporate tax cuts enacted last year boosted already hefty corporate profits, making most companies’ results look better by after-tax measures, but the benefit of the tax cuts also enabled companies to spend on talent and market share, sometimes raising expenses.
The other driver for investors’ increased focus on pre-tax margins may be inflation as industrial companies are forced to pay more for raw materials and companies dependent on consumer demand pay more in wages.
Tom Dorsey, co-founder of
