How Much Growth Companies Are Discussing the "I-Word" | ETF Trends

There are nine letters in “inflation,” but these days, it might as well be a four-letter word due to the adverse impact that soaring consumer and producer prices are having on risk assets.

As homes to a slew of growth stocks, the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) are among the exchange traded funds that investors may perceive as vulnerable to high inflation. With that in mind, it’s worth examining just how frequently companies mentioned inflation on their first-quarter earnings conference calls — a potentially instructive exercise because the second quarter ends in two weeks.

FactSet senior earnings analyst John Butters noted that on first-quarter earnings calls, 417 members of the S&P 500 mentioned inflation, easily topping the previous record of 357. Of course, some sectors are more inflation-sensitive than others.

“At the sector level, the Industrials (65), Consumer Discretionary (57), and Financials (55) sectors have the highest number of companies that cited ‘inflation’ on earnings calls for Q1. On the other hand, the Materials (100%), Consumer Staples (97%), and Consumer Discretionary (97%) sectors have the highest percentages of companies that cited ‘inflation’ on their Q1 earnings calls during this period,” said Butters.

Those are relevant data points for investors considering QQQ and QQQM because those ETFs track the Nasdaq-100 Index, which excludes financial services stocks. Likewise, as growth-heavy ETFs, QQQ and QQQM allocate just 10% combined of their respective weights to the industrials and consumer staples sectors. Of the aforementioned groups, only consumer discretionary at 15% is well-represented in these ETFs.

Not surprisingly, inflation is acting as a drag on corporate profits, but the degree to which that’s happening varies by sector.

“Given the high number of S&P 500 companies that have cited ‘inflation’ on Q1 earnings calls, have net profit margin expectations for the S&P 500 for Q2 2022 and CY 2022 been revised? The current net profit margin estimate of 12.4% for Q2 2022 is below the estimate of 12.7% on March 31, while the current net profit margin estimate of 12.6% for CY 2022 is equal to the estimate of 12.6% on March 31,” concluded Butters.

Interestingly, second-quarter earnings per share estimates are slightly higher today for the communication services and healthcare sectors than they were at the end of the first quarter. Those two groups combine for 23.5% of QQQ and QQQM.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.