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Global equities remain under pressure.
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Investors are grappling with a host of headwinds that are beginning to challenge the economic and earnings growth outlook.
More recently, investors have been digesting the results from a number of consumer companies that suggest the operating environment has become more demanding.
Over the past week, a number of “big box” U.S. retailers reported quarterly earnings reports. While results varied from one to the next, there were some distinct takeaways.
Reassuringly, consumer demand remains reasonably healthy, and some companies largely reiterated their revenue forecasts. However, some acknowledged a notable shift in demand from larger household and durable goods (like furniture, appliances and home improvement items) toward staples like food.
It’s worth noting that some kind of change in demand mix had been anticipated. More specifically, investors have been expecting demand for goods, which grew tremendously during the pandemic, to decline to more normal levels, while demand for services was expected to return in a meaningful way as the travel and hospitality sectors reopened.
This appears to be underway. But, the retail industry results suggest some consumers may be starting to prioritize food and other necessities, at the expense of more discretionary items, given price inflation and higher borrowing rates.
The other important, albeit less surprising, takeaway from recent results was with respect to costs. They continue to rise.
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This reflects a combination of supply chain challenges and overall inflationary pressures. Companies have kept elevated inventories because of concerns over the global supply chain. Meanwhile, freight, logistics, and labour expenses have been running higher than planned, which is consistent with issues noted across other industries.
Given the above, margins have started to come under pressure. Margins are a measure of profitability as they measure the difference between revenue and costs. Until recently, companies had proven to be quite resilient at navigating through a challenging supply and cost environment. But that appears to be starting to change, at least within the retailing industry.
Understandably, investors’ expectations are beginning to question whether other industries will inevitably start to see similar challenges in the months to come.
It’s fair to say economic and earnings growth are facing some headwinds. It’s not necessarily abnormal, as economic cycles usually come and go. The question remains whether the slowdown that is underway will turn into something more serious.
To answer that question investors worldwide will continue to observe the U.S. economy in particular. As the summer unfolds answers will be forthcoming with respect to the strength of global economies.
Mike Candeloro, senior portfolio manager and wealth advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at https://ift.tt/GPdN6gK or message him at michael.candeloro@rbc.com or on LinkedIn.
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