Bar graph compares YOY profit margin change for various sectors and the S&P 500 during various periods.
Table lists results.
|Period description||S&P 500 (%)||Cyclical sectors (%)||Secular growth sectors (%)||Defensive sectors (%)|
|High inflation periods||0.21||0.65||0.03||-0.47|
|High wage growth periods||-0.45||-1.54||-0.41||-0.22|
Equity sector risks
Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars; increasing household debt levels that could limit consumer appetite for discretionary purchases. Consumer Staples industries can be significantly affected by competitive pricing particularly with respect to the growth of low-cost emerging market production, government regulation, the performance of overall economy, interest rates, and consumer confidence. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research & development risk, government regulations and government approval of products anticipated to enter the market. Risks associated with investing in the Industrial sector include the possibility of a worsening in the global economy, acquisition integration risk, operational issues, failure to introduce to market new and innovative products, further weakening in the oil market, potential price wars due to any excesses industry capacity, and a sustained rise in the dollar relative to other currencies. Technology and Internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic condition.
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.
- 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.