COVID Can’t Constrain Corporate Profits

Published on: 09/21/2021

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss the impact COVID has had on corporate profits by looking at profit margins of the S&P 500 companies.

TRANSCRIPT:

TONY:

Welcome to another edition of Chart Talk.  I’m Tony Ogorek and I’m here with Portfolio Manager, Jeff Viksjo.  And Jeff, today, we are going to be talking about COVID and corporate profits.  I’m sure everyone’s seen the headlines where prices of certain commodities have gone through the roof.  Shortages, shipping containers that were $1,600 to ship stuff from China are now $16,000.  And you gotta think that those kinds of price increases, one-offs, would really be impacting corporate profits.  What does this chart show us about that Jeff?

JEFF:

Yea so Tony, we’ve seen prices surge for commodities; steel, copper, lumber, you name it.  We’ve also seen wages rise at a historically fast clip.  We’ve also seen energy costs go up.  So, you think all of these factors of production that companies would use would cause their profit margins to go down.  But what we are showing you on this chart today is the profit margin of the S&P 500 companies, and it’s actually never been higher, Tony, in the last 10-years.

TONY:

Yea I think it’s really interesting.  And don’t forget Jeff, part of the, probably 20 or 25% of the S&P 500 by market weight, by capitalization, tends to be technology companies, which have really prospered in this kind of environment.  However, there are other adjustments that companies can make.  For example, you look at chips and vehicles, and what they’ve done is moved it, the chips that they do have to the highest margin of vehicles they’ve got.  Also, from a commodity standpoint, some of the food companies are shrinking the size of the packaging that they’ve got, in order to have less of an input and be able to maintain their profits.

So this chart, really, is a wonderful look at why we like equities so much, is because, over time, they have the capacity to adjust to market conditions, whatever they are, and to be able to maintain profitability.  Which is what ultimately drives share price.

Thank you for joining us for this edition of Chart Talk and we look forward to seeing you at our next talk.

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