U.S. profit margins across equity styles

Sources: Bloomberg and Wells Fargo Investment Institute. Analysis uses monthly data from January 1, 1990 to June 30, 2022. Cyclical sectors include Industrials, Financials, Energy, and Materials. Secular growth sectors include Information Technology and Consumer Discretionary. Defensive sectors include Health Care, Consumer Staples, and Utilities. Real Estate and Communication Services were not included due to short history or material membership change in recent years. High inflation periods are months: (1) between 1990 and 2020 (2) when year-over-year consumer price index change was above 3.5% and (3) that did not overlap with recessions. High wage growth periods are months (1) between 1990 and 2020 (2) when the year-over-year wage increase was above 4% (3) that did not overlap with recessions. The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. See “Index Definitions and Asset Class Risk Disclosures” link above for equity sector risks.

Key Takeaways

  • Headwinds from higher input prices typically do not negate the tailwinds from economic growth as companies pass the higher costs to consumers.
  • Wage growth above 4% has been shown to reduce profit margins. However, as more people rejoin the workforce, we believe wage growth will normalize to a moderate pace.