We are now in the US earnings season. Months of anticipation will finally be satisfied as companies across the US show investors how their business has been affected amidst rising inflation and surging interest rates. Join us this week as we run through what might happen:
What is the Earnings Season?
Once every quarter in the US, publicly listed companies are required to release their earnings. In Australia, companies are only required to report earnings every 6 months. This is done over the course of about a month and offers current and potential investors the chance to see how a business has performed. Host Andrew Baxter is particularly intrigued this time round given the current conditions of the economy making the business world a very tricky place to navigate. It will certainly be interesting to see how companies have performed with increased interest rates and inflation remaining a major issue to contend with. If you’re a stakeholder in a company, it can be daunting to hear what’s been happening knowing that the stock may tank, but in the end it is very useful information for you and for the market as a whole.
The Effect of Higher Interest Rates
Across the world, interest rates have been going up quite quickly as central banks have been trying to bring down inflation. The reason is that, as Host Andrew Baxter explains, higher interest rates tend to have the effect of slowing everything down in an economy. Companies can be adversely affected by this in a couple of different ways. Firstly, they can be hurt by consumers not having as much disposable income as previously in order to be able to service their debts. This then results in lower sales and weaker earnings for the companies. From the business perspective, companies pursuing growth in their chosen field may struggle somewhat as the cost of debt is increasing.
As such, the cost of repayments increases along with higher interest rates, putting more pressure on companies in this sort of predicament. With costs on the rise, finding money becomes a necessity. If consumers are spending less, this then puts a squeeze on profit margins and can really sting the bottom line for the company.
The Strong US Dollar
The US dollar has strengthened quite significantly against some of the world’s other major currencies. Andrew Baxter notes this is often the case in countries where interest rates are going up that the currency should follow. The impacts this can have on American based companies can vary. Firstly, because the dollar has appreciated, goods they export to overseas buyers have now become more expensive to produce. So they are met with the choice of either absorbing the higher expenses. And holding prices or passing on the expense to the buyers.
Navigating this space can be tricky as the thing that springs to mind is to increase your prices. But if you do that you run the risk of being uncompetitive in terms of pricing in what is now a truly global market. This is a challenge we may see manifested in some of the earnings results set to come out this quarter.
Raw materials, labour and other expenses for businesses increasing present even more challenges for businesses in the current economy. This differs between services companies and manufacturing companies and Host Andrew Baxter explains how. Manufacturers must buy physical raw materials in order to produce their product. And would typically need to pay for the energy required to facilitate it. Energy costs are extremely high at the moment with the cost of coal at nearly all-time highs. As a business owner, you must decide between sacrificing your profit margin or passing along the costs to customers.
The service industry is slightly different. Labour costs are the primary costs for services and this can come in the form of wage pressure. Current unemployment in the US and Australia is very low & there is plenty of pressure trying to push wages higher. Again, money for increased wages has to come from somewhere and there is only so much you can pass onto your buyers.