Why Inflation Scares Haven’t Hammered the Stock Market

Despite the constant fear of inflation, the Dow Jones Industrial Average (DJI) and S&P 500 (GSPC) are flirting with new highs.

Isn't that the opposite of dominant narrative?

On paper, rising inflationary pressure, largely due to the epidemic, should be squeezing corporate profit margins and dragging on market expectations. So far this earnings season, that hasn't happened on balance, and stock prices have jumped on the less grim story quickly, according to experts.

"Investor mood had deteriorated significantly in the run-up to earnings season. However, we're seeing corporations provide strong earnings once again "NYSE senior market analyst Michael Reinking points out.

The data reveals that Reinking is right.

In the third quarter, almost 84 percent of corporations outperformed profit projections, matching the record levels set in the previous two quarters. Earnings have increased by 32.7 percent for those companies that have reported. Companies have been able to achieve great outcomes by combining price rises and cost reduction to counteract anything other than temporary inflation.

Meanwhile, according to Goldman Sachs, 65 percent of the 117 S&P 500 businesses that have reported profits thus far have outperformed consensus predictions by at least one standard deviation. This is a pace that, if maintained, would place the first and second quarters of 2021 among the strongest on record.

According to David Kostin, Goldman Sachs' top U.S. stock strategist, the percentage of businesses reporting above-consensus sales has also been above the historical norm.

Kostin continues, "Markets have moved along with modest signals of recovery from supply chain data and commodity prices, although management and analysts remain cautious."

Inflationary forces, on the other hand, are not amusing right now.

This year, Whirlpool CEO Marc Bizter told Yahoo Finance Live that his firm will take a $1 billion blow from inflation. He continues to retaliate by raising consumer costs.

"Different people have different ideas about what it means to be transitory. These days, I'm not sure how long you'd consider transitory. I mean, the fundamental question is whether we'll see expected cyclical inflation or whether we'll see structural inflation. Personally, I don't believe it's the latter. But, given the current inflationary atmosphere, I believe we will continue to see around us for some time. We're prepared to deal with the fact that it won't go away overnight, "Bitzer elaborated.

P&G Vice Chairman Jon Moeller stated on Yahoo Finance Live that inflation will cost the Tide manufacturer $2.2 billion in after-tax earnings this fiscal year. To safeguard margins, Moeller is also boosting prices on customers.

Even people like Jack Dorsey, the CEO of Twitter and Square, are already warning of hyperinflation.

Even if it isn't reflected in the larger market, investors are starting to take attention.

"Over the coming week, markets will be keenly focused on inflation, with investor predictions of future inflation rising to new multi-year highs in recent days." Jim Reid, a strategist at Deutsche Bank, says.

In the short term, though, market bulls appear to be in command.

Quips Reinking, "It appears that investors are becoming numb to these difficulties and are prepared to look past them, as we've seen many instances when equities gapped down on a forecast miss only to bounce later in the session."