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Peak Margins
August 9, 2021

Earnings season is nearing its conclusion for the U.S. and it has been a great season. With 442 S&P 500 companies having reported, 85% exceeded earnings forecasts and 83% beat on sales as well. Looking at data over two decades, these are historically elevated positive surprise rates. Even more impressive has been the magnitude of the surprises. On average, earnings beat by +17% and revenue by +5%. Wow. 


For a corporation, one thing that can cure most ailments, or at least alleviate them, is sales growth. Across those companies that reported, 86% had higher sales, and in aggregate this was an astonishing +28%. Yes, this is off depressed levels in Q2 of 2020, but it is more than just easy comparables. More sales allow a company the flexibility to allocate, re-invest, increase dividends/buybacks, acquire and the list goes on. When sales are flat, many of these options just are not feasible. 

Sales growth has also been helping alleviate the problem of rising costs. We have all seen it in our regular consumer lives – prices are up. And while many point to this inflationary burst as temporary, as the economy re-adjusts from the pandemic, price declines tend to be very slow or sticky. These higher costs are impacting companies, but rising sales growth, whether from passing through costs and/or rising volumes, have been more than offset. 

This shouldn’t be news. Sales growth has a long-term relationship with margins (chart 2) . In fact, the correlation is about 0.5 and while they occasionally drift in different directions, this is very temporary. 

Sales growth has also been helping alleviate the problem of rising costs. We have all seen it in our regular consumer lives – prices are up. And while many point to this inflationary burst as temporary, as the economy re-adjusts from the pandemic, price declines tend to be very slow or sticky. These higher costs are impacting companies, but rising sales growth, whether from passing through costs and/or rising volumes, have been more than offset. 


This shouldn’t be news. Sales growth has a long-term relationship with margins (chart 2). In fact, the correlation is about 0.5 and while they occasionally drift in different directions, this is very temporary.


Chart 3 is what executives are saying on conference calls, mainly earnings calls. The bars are indexed to late 2019 before the pandemic and indexed to 100. Inflationary and wage pressure references dropped during the early pandemic months, but inflationary cost pressures have now skyrocketed. Wage pressures are starting to be talked about a little bit. Citing margin pressure remains low but we would be willing to bet this will start to rise in the months ahead.

Source: Alphasense

Investment Implications 

As sales growth slows, and if inflationary pressure remains elevated, we believe that more companies are going to see margin pressures, especially if wages begin to pick up. Added attention should be given to companies’ ability to pass through costs, and their sensitivity to labour cost inflation. It’s coming, but for now let’s just enjoy these fat margins.

Charts are sourced to Bloomberg L.P. unless otherwise noted.


The contents of this publication were researched, written and produced by Richardson Wealth Limited and are used herein under a non-exclusive license by Echelon Wealth Partners Inc. (“Echelon”) for information purposes only. The statements and statistics contained herein are based on material believed to be reliable but there is no guarantee they are accurate or complete. Particular investments or trading strategies should be evaluated relative to each individual's objectives in consultation with their Echelon representative. 


Forward Looking Statements


Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.


The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.


The particulars contained herein were obtained from sources which we believe are reliable, but are not guaranteed by us and may be incomplete. The information contained has not been approved by and are not those of Echelon Wealth Partners Inc. (“Echelon”), its subsidiaries, affiliates, or divisions including but not limited to Chevron Wealth Preservation Inc. This is not an official publication or research report of Echelon, the author is not an Echelon research analyst and this is not to be used as a solicitation in a jurisdiction where this Echelon representative is not registered.


The opinions expressed in this report are the opinions of its author, Richardson Wealth Limited (“Richardson”), used under a non-exclusive license and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. (“Echelon”) or its affiliates.


This is not an official publication or research report of Echelon, the author is not an Echelon research analyst and this is not to be used as a solicitation in a jurisdiction where this Echelon representative is not registered. The information contained has not been approved by and are not those of Echelon, its subsidiaries, affiliates, or divisions including but not limited to Chevron Wealth Preservation Inc. The particulars contained herein were obtained from sources which we believe are reliable, but are not guaranteed by us and may be incomplete.


Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. Echelon and Richardson do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.


Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements. 

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