Time to ‘buckle up’ as ‘inflation’ skyrockets during earnings calls, warns BofA

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Investors may want to “buckle up” as companies signal inflationary pressures in an earnings season heading into its busiest week, according to Bank of America Corp research. The number of “inflation” mentions during Earnings calls for companies included in the S&P 500 SPX, + 0.26% have more than tripled year-over-year per company, the biggest jump since 2004, BofA Global Research said in a note Monday. Historically, the tally “has led the CPI by a quarter with a correlation of 52% and points to a strong rebound in inflation going forward,” BofA’s equity and quant strategists warned in the report.

Strategists said raw materials, transportation and labor were cited as “main drivers” of inflation during the calls. Many companies plan to raise prices due to higher costs, or have already done so, with inflationary pressures seen in sectors that include consumer, industrial and materials, according to the note. “The question it really boils down to is, ‘How quickly does the baton go from some of the short-term inflation to a more prolonged and substantial inflation that comes from the labor market and wages?’ Victoria Fernandez, chief market strategist at Crossmark Global Investments, said in a telephone interview Monday. “Maybe it’s a little bit faster than people anticipate if we don’t see workers coming back into the workforce.” Market volatility could well rebound as investors fear the Federal Reserve could fall “a little behind the curve” in inflation by taking “such a moderate stance,” according to Fernández. Still, he expects that any increase in inflation over the next few quarters, even in areas like commodities, will be relatively brief as the economy reopens in the FTGC pandemic, + 1.22% CPER, + 2.51%. “The longest-lasting true inflation generally comes from wages,” Fernández said. Meanwhile, corporate earnings in general have been meeting or exceeding expectations in the first quarter, he added. That is supporting stock market valuations that many investors are concerned about will stretch. “You have to be careful where you are buying your names,” Fernandez said. Crossmark is favoring areas in technology that are far from the “high-flying tech names,” including Internet business and data infrastructure stocks that have good growth potential over the next two years, he said. For example, Crossmark likes Adobe Inc. ADBE, -0.27% and Nvidia Corp. NVDA, + 0.93%, added Fernández. Read: Should You Buy Nvidia Stock? Here are the key numbers to watch now More than 100 companies in the S&P 500 Index have reported their first-quarter earnings, and this week is the busiest of the season, according to the BofA report. The S&P 500 is up 11.5% this year based on Monday afternoon trading. BofA strategists use natural language processing to analyze earnings transcripts to measure sentiment and report their stock pick preferences. “Corporate sentiment has risen to an all-time high so far this earnings season,” the strategists said in their note. “This corroborates our preference for cyclicals over defensive stocks, which have historically outperformed when this measure has improved.”