Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, was off 1.6% for the week.
  • Corporate profits have been strong recently, while inflation remains perkier than the Fed likely prefers.

On Wednesday, the Bureau of Labor Statistics published its March CPI inflation report. Economists and the market expected month-over-month core inflation of 0.3%. The figure came in at 0.4%. So far in 2024, core inflation has stopped falling.  

That makes three straight warmer-than-expected CPI prints to start 2024, which have forced investors to reevaluate expectations for interest rate cuts by the Federal Reserve. Futures markets had six 0.25% rate cuts priced in heading into the year; now, the baseline is for one or two cuts later in the year.

Stocks fell for the week, but overall, public equity markets have been good since last fall. The main reasons for this are that US corporate profits surged in 2023, and profits are expected to grow in 2024 and 2025.

Profits are not the same as profit margins, but as profits go, so do margins, typically – and corporate profit margins, which had been strong prior to 2020, have managed to rise over the last three years. The chart below shows that profit margins remain well above 1951 to 2019 levels. The macroeconomic environment has been fruitful for profit margins:

Source: Matthew Boesler, Bloomberg, March 28, 2024

A key driver of corporate profits is economic investment. “Investment” in this sense means wealth creation – the building of factories, machines, houses, software code… however one may define it, investment has been on the upswing.

A timely example of investment as a driver of profits is TSMC’s ongoing microchip fabrication facility project in Arizona, a project receiving substantial financial support from the US government. TSMC’s facilities are capitalized on TSMC’s balance sheet as assets and expensed over time. For the contractors and TSMC employees building the facility, however, the cash received is revenue. Per TSMC Arizona’s website, the company’s Arizona investment will create approximately 6,000 high-tech, high-wage jobs and more than 20,000 accumulated unique construction jobs. TSMC’s Arizona project is supported by a construction workforce of nearly 10,000 on the project daily.

The story about higher profits driven by corporate investment may be related to the story about persistently warm inflation. Tracy Alloway and Joe Weisenthal at Bloomberg noted this week that growing investment into data centers for AI and battery plants has created shortages of heretofore boring electrical components such as switchgears and transformers, which are now in severe shortage for small firms looking to do their own business investment.

A strange feedback loop seems to be at play, where large-scale investment by large firms is occurring despite higher rates – backed by huge corporate balance sheets. That investment is creating supply shortages, which coupled with higher interest rates is limiting smaller firms from investing in other parts of the economy, keeping inflation warm.

This is a tricky situation developing for the Fed, which believes higher interest rates are necessary to bring inflation down via the demand-side, but which also does not want higher interest rates to be contributing to perky inflation on the supply-side.


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