Profit margins are tightening as inflation remains at elevated levels, with a slew of companies – including Walt Disney, PepsiCo and Spotify – all warning of margin pressures, casting a veil over profit growth in the upcoming quarters. Patrick Armstrong, chief investment officer at Plurimi Wealth, believes this is the “biggest risk” for stocks going forward. He said market expectations for S&P 500 earnings next year seemed too high, given the looming pressures. “[Earnings] downgrades can be massive. The consensus is still too high. Margin compression is [the] the biggest risk to equities,” Armstrong said in notes shared with CNBC. “I don’t think we’re entering an environment where companies will have the same kind of pricing power they’ve enjoyed this year.” , he added on CNBC’s Pro Talks on Wednesday. “Consumers are going to see their purse strings pulled by utility bills, higher mortgage costs, higher gas prices, and there goes. have margin compression.” This comes after John Waldron, chairman and chief operating officer of Goldman Sachs, told CNBC last month that inflation is the “most important issue we all need to address in this moment.” He said wage pressure and rising commodity prices were particularly difficult and could eat into companies’ margins. But some companies could turn the tide, according to Armstro ng, whose Plurimi AI Global Equity Strategy fund beat the MSCI World Index up 8.2% in October. What the asset manager likes is the agribusiness sector. “Consumers are going to be faced with tough choices about where to spend, but eating will be something they will always be looking to spend money on,” he said. Its top picks in the space are food processing company Archer-Daniels-Midland, fertilizer maker Mosaic Co., agricultural chemical and seed company Corteva, as well as farm machinery maker Deere & Co. “I think grain prices are probably going to keep going up. And farmers are going to find every acre of arable land they have. So more pesticides, more fertilizers, more intensive farming and cash flow to buy also farm equipment,” Armstrong said. added. Health care He also likes health care, which he describes as a “very stable” sector with “predictable cash flow”. It also trades at reasonable multiplications, he added. His top picks in the space are Swiss pharmaceutical company Roche for its “stable cash flow” and “attractive” yield, and Denmark’s Novo Nordisk for its leadership in diabetes treatment. Luxury stocks are another Armstrong favorite. “Luxury consumers do not suffer from the same headwinds as mass market consumers. [They are] not pinched by utility bills, gas prices and mortgage costs,” he said. Moreover, the “massive” profit margins of luxury companies are also protected from increases in input prices, he added. LVMH and Hermes, given their “defensible margins” and ability to set prices. Energy The energy sector may be by far the best performing sector this year, but Armstrong thinks some energy names are “still cheap.” are refiner Equinor, shale operator EOG Resources, as well as BP and Shell. He noted that companies are “repaying debt, buying back stock and [distributing] dividends.”
Market pros name stocks that could do well with margins under pressure
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