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Booming Earnings Fail to Distract Investors From Inflation Obsession

Corporate earnings show significant gains for many industries, but not enough to take investors' minds off of soaring inflation or the delta variant.

MANHATTAN (CN) — Markets flatlined this week, driven mostly by steep losses on Thursday as investors continue to become weighed down by dispiriting news on inflation.

Since last Friday the Dow Jones Industrial Average has lost 184 points, losing 300 points on Friday alone after gaining a bit earlier in the week, while the S&P 500 lost 42 points, and the Nasdaq declined 274 points.

One of the major data points this week has been corporate earnings, which continue to show significant gains for many industries.  

Financial institutions like Goldman Sachs and JPMorgan Chase have reported earnings better than analysts had expected. Goldman posted one of its best quarters since the Great Recession, with $15.3 billion in revenue and about $5.5 billion in net earnings during the second quarter of 2021. JPMorgan also rocketed past expectations, posting $31.4 billion in managed revenue and $9.6 billion in net earnings.

In the beverage space, PepsiCo did even better, blowing past expectations to report a 20.5% increase in revenue growth to hit $19 billion in net revenue last quarter. UnitedHealth Group also saw its earnings targets grow, reporting $71.3 billion in revenue last quarter and adjusted earnings of $4.70 per share.

Contrasted against similar earnings reports earlier this year and late last year, however, the news did not have much of an impact on investors.

“Investors have aggressively and fully embraced the idea that we have seen the ‘best’ of everything: the best pace of re-opening headlines, the vest vaccination impact, the best of the economic rebound, and the best of, perhaps, earnings,” Tom Essaye of the Sevens Report wrote in an investor’s note.

Essaye also noted that while growth may have peaked, it will be robust for a while, and inflation is still high that also will continue. “For now, the headlines and events aren’t explicit enough to get the market out of the ‘best behind us’ doldrums,” he wrote. “But barring another Covid setback or sudden roll over in growth, we expect that they will be potentially starting in the next month or two.”

Inflation also remains front and center for Wall Street and Capitol Hill both.

During testimony before the Senate Banking Committee, Fed Chair Jerome Powell said current inflation spikes are “unique in history” and that the central bank is reacting accordingly. “We don’t have, you know, another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” Powell told senators on Thursday. “We’re trying to both understand the base case and also the risks.”

The Fed has aimed to keep inflation at an average of 2%, but year-to-date core inflation has risen 4.5%, according to the most recent data. The biggest gains have been in used cars, which gained nearly 50% in value compared with a year ago, as well as airline and hotel prices now that most lockdowns have ended.

Several lawmakers, mostly Republican, have cried foul over the Fed’s approach to inflation. “Since the Fed has proven unable to forecast the level of inflation, why should we be confident that the Fed can forecast the duration of inflation?” asked Senator Pat Toomey of Pennsylvania.

Powell did note that as high inflation persists, the central bank would reevaluate the risks of keeping interest rates low while the economy recovers from the pandemic.

Treasury Secretary Janet Yellen also has indicated she expects inflation to remain for the next few months. In an interview on Thursday with CNBC, Yellen said regulators are watching inflation “very closely” but noted inflation is “largely confined to sectors that are now opening back up” like airfare, hotels, and cars.

“I think we will have several more months of rapid inflation,” she said. “I’m not saying this is a one-month phenomenon, but I think over the medium term we’ll see inflation decline back toward normal levels.”

The other major problem for smaller businesses now are supply bottlenecks and staff shortages, according to two recent surveys.

The first, conducted by the U.S. Chamber of Commerce, found that less than half of small businesses that are hiring employees have been able to find adequate candidates.

“Small businesses are bearing the brunt of the current worker shortage,” Tom Sullivan, vice president of small business policy at the organization, said in a statement. “Many have given up on actively recruiting new workers, as it’s too hard to find skilled and experienced workers for their open positions.”

Fortunately, more than half of the small business owners in the poll think the economic climate in this country will return to normal within six months to a year,

According to the second survey, put together by the National Federation of Independent Business, the supply-chain problems and staffing shortages are at the forefront of business owners’ minds. Nearly one-fourth of small business owners in the survey said they are experiencing a “significant staffing shortage,” and of those suffering a staffing shortage about half say it has impacted their bottom line.

“Small businesses are still recovering from the pandemic but need to fill open positions in order to get back to full productivity,” Holly Wade, executive director at the NFIB research center, said in a statement. About one-third of respondents reported supply-chain disruptions, while more than half said the disruptions are having a worse impact on their businesses than three months ago.

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