Greedflation is Real When Looking at Q1 Earnings

But corporate greed may also help fight against a looming 2023 recession

As we end the final month of the 2nd quarter of 2023, investors and financial analysts are adjusting their perspectives on a rather unconventional economic phenomenon that has been dubbed “Greedflation.”

The term describes the tendency of businesses to exploit inflationary environments to justify significant price increases. Contrary to the name’s negative connotation, Greedflation might actually have beneficial implications for the broader economy.

Greedflation 101
The S&P 500’s average earnings-per-share did register a decrease of 1.4% year over year, marking the second consecutive quarter of decline. Nevertheless, this downtick sharply defied Wall Street’s anticipations, which had pessimistically foreseen a steeper slump of 5.9%.

There is a compelling argument for investors to reconsider the corporate practice of leveraging inflation as a means of boosting profit margins. In essence, this opportunistic approach that businesses have adopted in response to the inflationary environment appears to be bolstering the economy and helping to counter the specter of a potential recession.

The crux of Greedflation lies in the ability of companies to adjust prices upwards to meet or exceed inflation rates. This strategy, while seemingly benefitting the corporations at the expense of consumers, may paradoxically yield positive effects for the wider economy in the longer term.

Companies are often able to pass on higher costs to their customers during periods of inflation. This dynamic is seen in the form of increased product or service prices. While this leads to higher costs for consumers, it also allows companies to maintain or even improve their profit margins, which can stimulate business growth and development.

Think as an Investor
From an investor’s viewpoint, a company that can maintain or expand its profit margin amidst an inflationary period is desirable as it demonstrates robust business acumen and financial resilience. This, in turn, could lead to higher stock valuations and better returns for shareholders.

Furthermore, robust corporate profits can drive employment and wage growth. Companies that are profitable are more likely to invest in expansion, which often entails hiring more employees. Additionally, to retain talent in a high-inflation environment, companies may increase wages, indirectly contributing to the cycle of inflation but also improving the standard of living for their employees.

Moreover, the increased revenues from higher prices can often lead to increased tax revenues for the government. This revenue can then be reinvested into the economy in the form of public spending, further stimulating economic activity.

Planning Matters
Greedflation should not be dismissed as a purely negative phenomenon. While its immediate effects can be challenging for consumers, this unconventional corporate strategy may indeed be a necessary mechanism for navigating an inflationary environment. Investors, therefore, need to critically assess this phenomenon as it may herald positive economic outcomes in the long run.
As always, the key to navigating such complex financial landscapes lies in maintaining a balanced and informed perspective. Investors would do well to remain alert to these developments as they continue to shape our evolving economic reality.

Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal.
S&P 500 Index: The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.