Do Surging "Prices Paid" Imply A 20% Plunge In S&P 500 Profit Margins?

Tyler Durden's picture

Whereas yesterday Zero Hedge looked at the relationship between the ISM Price Paid index and the broad inflation CPI (coming to the conclusion that 12 months from today the CPI may be increasing by a massive 6%+), today we look at a correlation with the metric that should be even dearer to investor hearts: operating margins. The chart below shows the PMI Price Paid index compared to an inverted scale of of the S&P margin. It appears that margins follow the PPI with a four quarter delay, and while the period between 2003 and 2007 did not see a major contraction in margins, this can be attributed to massive abundance of liquidity available to the common man which allowed companies to pass through costs for more aggressively than before. Alas, and as confirmed by Whirlpool and Electrolux' results today, such an outcome this time around is impossible. One thing is certain: should February's Price Paid index continue to rise, margins will, intuitively, have no choice but to plunge. Which is why we anticipate a dramatic 15-20% drop in margins, an outcome which will have material consequences on S&P 500 EPS forecast.

On this chart below, keep an eye out on the orange line. It is going much higher...

h/t Harrison