Publicly traded companies are not charities 💸

It is 'dangerous' to underestimate Corporate America's ruthless pursuit of profits ⚠️

(Source: Wikimedia Commons)

“It is dangerous to underestimate Corporate America's margin preservation skills,” wrote Savita Subramanian, head of U.S. equity strategy at BofA, in a May 1 research note.

Subramanian has been warning about this for at least a year and a half. For more on this, read: Why it’s ‘dangerous' to underestimate Corporate America ⚠️

And she has been prescient. Quarter after quarter, S&P 500 companies have been reporting better-than-expected earnings, bolstered by near-record profit margins.

But as we’ve been discussing here at TKer, Corporate America’s ability to keep profit margins high has also helped keep inflation hot. Indeed, The New York Times just published a big feature titled, “Companies Push Prices Higher, Protecting Profits but Adding to Inflation.“

This narrative reflects a tension investors in the stock market should understand: The economic interests of consumers and big corporations aren’t totally aligned. Consumers may not welcome higher prices. But if they demonstrate a willingness to pay, corporations will keep raising prices if it means higher profits.

Talmon Joseph Smith, one of the reporters on the Times’ feature, is a regular reader of TKer. He shared on Twitter a passage from the April 28 TKer that he used in his research:

…This is another example of a company that wasn’t struggling to stay profitable. Rather, it’s just trying to keep profits growing.

This is an exercise you can repeat on your own. Look up companies that have announced a mass layoff, see if they have been profitable, and see if analysts expect continued profit growth in the years to come.

Publicly traded companies are not charities 💸

As we often say here at TKer, the most important long-term driver of stock prices is earnings growth. Because earnings have been rising for decades, so have stock prices.

Whether it’s going from unprofitable to profitable or profitable to increasingly profitable, what matters is that the numbers on the bottom line are going up and to the right.

Shareholders instill this mentality in the C-suite by tying executive compensation heavily to earnings growth targets. These compensation packages usually include a lot of stock — and, as we know, earnings drive stock prices.