Weakening US profits

The truth is in the pudding: S&P 500 companies have been showing last quarter the weakest earnings performance since Q3 2020, with earnings down 2.8% y-o-y. Also US companies are surprising to the upside in earnings by only 1.6%, the smallest magnitude in 15 years. This is surprising to the extent that the US corporate world has been very good historically in guiding analyst’s earnings forecasts and deliver surprises driving their share prices up when they publish results. Now earnings growth is below revenue growth. To us this is a sign of negative operating leverage as companies are no longer able to pass on cost inflation to their clients by simply increasing prices. In a tougher environment for companies, we continue focus on undervalued earning power, id est companies with strong moats giving them the necessary pricing power to steer through the current inflationary environment.