Fed Pivot is Timely and Welcome

500 Sector Level Profit Margins – Not All Sectors are Created Equal

On Wednesday, December 15, 2021, the Federal Reserve doubled down on the rate of the asset purchase taper. They approved plans that will more quickly scale back their pandemic stimulus efforts, ending the asset purchases by March of 2022 instead of June. The door is now open for the Federal Reserve to begin raising rates in mid-March.

The rate increases of 2022 will be welcome with open arms to help curb the inflationary forces pressuring corporate profit margins. Manufacturers of goods and services have responded to inflationary pressures by raising prices by the most in almost 4 decades. Corporations have been forced to pass cost increases off to consumers, the result has been unprecedented levels of year-over-year revenue growth. To date, all S&P 500 sectors have experienced success accelerating revenue growth and expanding margins at all levels. But for one sector, in particular, utilities, the rate increases have arrived just in time!

From the chart above, you can see tremendously strong year-over-year revenue growth as companies attempt to pass cost increases along to customers. The bad news is that the equal-weighted average utility stock in the S&P 500 is still losing ground in the war against input cost inflation as Gross Margins are now rolling over. The utility sector is the first S&P 500 sector to show a margin break down at all the Gross, Operating (EBIT), and Net Margin levels. In summary, we will continue to monitor all sectors looking for signs of margin erosion that could hamper equity valuations. Thankfully, it looks like rate increases may have arrived just in time to stabilize corporate profit margins in 2022, even for the utility sector!

Joe Maas, CIO | CFA, CFP®, ChFC, CLU®, MSFS, CVA, ABAR, CM&AA, CCIM
David Stryzewski, CEO | CSA, NSSA