Sherwin Williams (NYSE: SHW) shares fell 4% following the company downgrading its outlook for Q3 and the full-year due to inflationary pressures and challenges getting raw materials.
The company is expected to release its Q3 results later this month, but this is another sign that inflationary pressures are beginning to affect companies in a more tangible way. It's also another indication that inflationary pressures are finally starting to eat into corporate margins. In previous quarters, companies had been talking about the
Remarkably, Sherwin Williams was one of the best-performing stocks during the pandemic as the combination of stimulus payments and so many outlets for spending being unavailable meant that people were spending more on upgrading their homes. Additionally, the company is helped by rising home prices which is also supportive of remodeling.
Finally, another headwind for Sherwin Williams is rising oil prices given that so many paints are oil-based. For much of the last decade, this has been a bullish tailwind as falling oil prices meant that margins were improving. It's also notable because Sherwin Williams has been regarded as one of the best operators in terms of the company's reputation and financial performance, but the company also benefited from positive macro conditions which is no longer true.
Stock Market Impact
Inflation has many negative effects. But for the overall economy, it's less than expected and moderate levels can even stoke economic activity. One reason that the overall economy does fine during inflationary periods is that Sherwin Williams' struggles will turn into increased profits for energy companies and the businesses that sell products and services to them. Of course, high and persistent levels of inflation can eventually erode consumer spending or cause the Fed to tighten policy to reduce economic activity.
This will be one of the major themes to watch this earnings season along with companies talking about supply chain issues. So far, 16 out of 21 companies reporting in the S&P 500 (NYSE: SPY) have topped their earnings estimates but an equal percent of companies have talked about inflation and supply chain challenges.
Currently, S&P 500 earnings are expected to grow by 27% on a year-over-year basis this quarter while profit margins are expected to stay flat.