Safety margin or error? Pricing power is key

By J. Keith Buchanan, CFA, portfolio manager – GLOBALT Investments

Supply chain disruptions. Escalating energy costs. Rising labor costs. Rising interest rates. If you were listening to an economist describe their recent analysis or a business management team perusing their company’s recent performance or future prospects, one or more of the aforementioned developments will likely enter the conversation. In isolation, each of these developments would cause consternation among American businesses. However, when they occur simultaneously, this single event can only mean one thing: the cost of doing business is increasing at a rate that the markets have not seen for most of a generation.

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Profit margin, or an entity’s income minus expenses, is a general indication of a company’s profitability. How much of every dollar earned does a business have to spend to earn the next dollar? It is the essence of the financial success of businesses, industries and economies. Overall, the profit margin encompasses many facets of the costs and competitive pressures faced by the businesses included. The chart below shows that the operating profit margins of the S&P 500 Index have broken recent records. Periods of recession are usually associated with squeezing margins, as corporate revenues decline faster than they can reduce expenses. However, the recent expansion of margins beyond pre-pandemic highs has been dramatic and helps justify historic levels of prices for stocks and other risky assets. Businesses have never been as profitable as they are today. Investors are willing to pay more for a business (all other things being equal) if and when they generate more income compared to expenses.

Source: Bloomberg Finance LP

Sudden and widespread cost inflation can pose a threat to these historically high corporate margins and profits, and hence investor appetite for exposure to affected companies. There is a balm, however. There is a surefire way to weather the storm of uncontrollable input costs and other costly developments in income acquisition. Raising the prices of goods and services faster than cost inflation has the effect of preserving the profitability of the business.

Can all businesses and industries exhibit this kind of pricing power at the same time? Of course not. Without a doubt, there will be winners and losers on the way to a more stable cost environment. However, we believe that the market, as the ultimate judge, will favor companies that demonstrate they have enough pricing power to stay ahead of rising costs, as uncertainty persists as to the duration of this new cost environment.


GLOBALT has been an SEC registered investment adviser since 1991 and, as of July 10, 2013, remains a registered investment adviser through a separately identifiable division of Synovus Trust NA, a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be construed as a solicitation to buy or sell any security. This does not constitute legal or professional advice and is not tailored to the investment needs of a specific investor. The registration of an investment advisor does not imply a certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, additional information may be required to make informed investment decisions, depending on your individual investment objectives and specifications. ‘adequacy. Investors should seek personalized advice and should understand that statements regarding the future prospects of the financial market may not come true as past performance does not guarantee and / or indicate future results. The content may not be reproduced, distributed or transmitted in whole or in part by any means whatsoever without the written permission of GLOBALT. For authorization, as well as to receive a copy of GLOBALT’s ADV Part 2 and 3 Forms, contact GLOBALT’s Compliance Officer, 3400 Overton Park Drive, Suite 200, Atlanta GA 30339. You can get more information. Information about GLOBALT Investments and its advisers via the Internet at advisorinfo.sec.gov, sponsored by the United States Securities and Exchange Commission.

The opinions and certain comments contained in this document reflect the judgment of the author as of the date indicated.

The investment products and services provided are offered by Synovus Securities, Inc. (SSI), a registered broker, FINRA / SIPC member and SEC registered investment advisor, Synovus Trust Company, NA (STC), Creative Financial Group, a division from SSI. Trust services for Synovus are provided by STC.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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