Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping Corporate Earnings Calls
Transcript
- Lucas: So Luna, you know how we always say stagflation shows up in weird places? Well, this week I stumbled onto something that feels like the canary in the coal mine for how companies are actually experiencing this economy. Luna: I'm listening. What is it? Another index that's flashing 1970s vibes? Lucas: Sort of, but it's not a market index. It's the language of corporate earnings calls. I was digging through transcripts from the latest earnings season, and the word 'stagflation' itself has shown up three times as often as it did just two years ago. But more interestingly, CFOs are starting to use a whole vocabulary that basically translates to 'we're stuck between rising costs and slowing demand.' Luna: So they're not literally saying 'stagflation,' but they're describing it. What are the actual phrases? Lucas: Things like 'input cost inflation' and 'demand elasticity' and 'volume challenges.' And you hear it across sectors—not just consumer goods, but industrials, tech hardware, even some services. It's like the transcript is a mirror of the macro data we've been tracking all summer. Luna: Well, the macro data definitely supports that. Core PCE just came in at 3.3 percent annualized for July, and real GDP growth slowed to 1.5 percent annualized in the second quarter. That's the textbook definition of stagflation—inflation running well above the Fed's target while growth crawls. Lucas: Right. And the interesting part is how companies are navigating it. In the old playbook, if you had pricing power, you just raised prices and your margins held. But this time, the demand side is too weak. One mid-cap industrial manufacturer I looked at raised prices by six percent year-over-year, and their gross margin still dropped 240 basis points. That's a huge miss. Luna: Ouch. So they're passing on costs, but volumes are falling faster than the price increases can compensate. Lucas: Exactly. And that's the classic stagflation squeeze. The CEO actually said on the call, 'We're seeing cost inflation that we can't fully pass through without destroying volume.' That's a direct quote. It's like they're reading from a 1970s economics textbook. Luna: It's almost poetic. But this has to be changing how analysts ask questions too, right? I imagine they're not just asking about guidance anymore. Lucas: Absolutely. The analyst questions have shifted from 'what's your growth outlook' to 'how are you managing input costs' and 'what's your pricing power over the next twelve months.' They're probing for elasticity. And you see more companies giving explicit 'price versus volume' breakdowns in their earnings releases. That's a big shift from a few years ago. Luna: So in a way, earnings calls are becoming a real-time gauge of stagflation. Maybe more useful than some of the lagging indicators we get. Lucas: Yeah, and it's not just anecdotal. I ran a quick search across transcripts and found that mentions of 'input cost inflation' have more than doubled since 2024. And 'demand elasticity' has quadrupled. These are terms that were almost absent from earnings calls in the late 2010s. Luna: That's a stark shift. And it's probably not just mid-caps. I'd bet the big tech names are starting to use similar language, even if their margins are still thick. Lucas: You're right. Even some mega-cap tech companies have acknowledged input cost pressures in their supply chains, though they often frame it as 'strategic investments' rather than cost inflation. But the smaller companies are the ones where you really see the strain. Luna: Because they have less pricing power to begin with, and their balance sheets are thinner. It's like the economy is a game of Jenga, and the mid-caps are the blocks getting pulled first. Lucas: That's a good metaphor. And it makes you wonder about the ripple effects. If these companies can't protect margins, they're going to cut costs somewhere—and that usually means hiring freezes or layoffs. But here's the thing, we're also seeing some counterintuitive data: unemployment actually ticked down to 4.1 percent in July, and jobless claims are still pretty low. Luna: So the labor market is holding up so far, but that could change if companies start seeing sustained margin compression. It's like the calm before the storm. Lucas: Exactly. And that's why the Fed's hawkish turn is so interesting. You have Fed officials like Hammack saying 'now is the time to act' on rates, and Chairman Warsh talking about a 'quieter' central bank. They're clearly worried about inflation, but if they tighten too much, they could tip the economy into a recession—or make the stagflation worse. Luna: It's a tough spot. And the bond market is already pricing in some of that, with the ten-year breakeven at 2.33 percent, which is up from 2.32. So inflation expectations are still anchored, but the pressure is there. Lucas: Right. And you have big names like Druckenmiller doubting the Treasury's bond strategies. That adds another layer of uncertainty. But let's get back to the earnings calls, because I think there's a really interesting angle here about how companies are changing their guidance practices. Luna: Oh, yeah. Are they giving wider ranges? Or more conservative outlooks? Lucas: Both, actually. We're seeing more companies issue 'pre-announcements' or 'preliminary results' even before the official call, which used to be rare. And when they do give guidance, the ranges are wider. For example, one consumer staples company I follow gave an earnings per share range that was almost twice as wide as they'd given in 2023. They basically said, 'We have no idea what's going to happen with demand.' Luna: That's a pretty honest admission. But it also makes it harder for investors to value these companies. You're seeing more volatility in stock prices after earnings, right? Lucas: Exactly. The average post-earnings price move has widened significantly across the S&P 500. It's not just the small caps. And that's a direct consequence of the macro uncertainty. Investors are trying to parse these calls for clues about the future, but the companies themselves are in the dark. Luna: So what does this mean for the average person listening? If they're invested in individual stocks, they need to be more prepared for volatility around earnings season. And maybe they should pay attention to the language in the call, not just the numbers. Lucas: Absolutely. And that's one of the things we try to do on this show—help people make sense of these signals. Speaking of which, you know, we keep this podcast ad-free because we think that's the right way to deliver this kind of analysis. But it's only possible because of listener support. If you've found value in these conversations, a small contribution at buy me a coffee dot com slash fexingo would mean a lot. It keeps us independent and free from sponsor pressure. Luna: Yeah, and we really appreciate every bit of support. It lets us dig into topics like this without having to worry about pleasing advertisers. Now, back to earnings calls—Lucas, you mentioned that companies are getting more creative with their cost-cutting language. What are some of the weirder euphemisms you've noticed? Lucas: Oh, there are some gems. 'Strategic efficiency programs' is a big one. 'Portfolio optimization' is another. One company actually said they were 'rightsizing their cost structure to align with the demand environment.' That's a mouthful. Luna: Rightsizing. Sounds like a euphemism for layoffs, honestly. Lucas: It often is. But here's the thing—some companies are using these calls to actually signal their resilience. For example, a specialty chemicals firm I looked at said they were using the downturn to gain market share from smaller competitors who can't absorb the cost pressures. That's a 'countercyclical opportunity' play. Luna: So stagflation is also creating winners and losers. The strong get stronger because they can ride out the margin squeeze while their weaker rivals falter. Lucas: Exactly. And that's a pattern we've seen in past stagflationary periods. The 1970s were brutal for many companies, but some firms that managed costs well and had pricing power actually came out ahead. The key is being able to pass through costs without losing too much volume. Luna: So for investors, the takeaway might be to look for companies with that kind of pricing power and cost discipline. But also to be cautious about companies that are heavily exposed to volume declines. Lucas: Right. And that's where the concept of 'quality' in stocks becomes even more important. In a stagflationary environment, quality—meaning strong balance sheets, consistent cash flows, and pricing power—tends to outperform. That's not a new insight, but it's reinforced almost every quarter in these calls. Luna: And we're seeing that in the market too. The S&P 500 is up 0.7 percent over the last five days, but the Russell 2000 is down 0.6 percent. So large caps are holding up better than small caps, which makes sense given the margin pressures we've been talking about. Lucas: That's a great point. And it's interesting because the Nasdaq is up 1.6 percent over the same period, so tech is doing well. But that might be more about AI enthusiasm than stagflation dynamics. Still, the dispersion in performance is a direct reflection of who is better positioned to navigate this environment. Luna: So to wrap it up, what's the one thing you'd want a friend to remember about earnings calls in a stagflation era? Lucas: I'd say listen for the words they use. If you hear 'input cost inflation' and 'demand elasticity' in the same sentence, and they're talking about widening guidance ranges, that's a company that's feeling the stagflation squeeze. And that's a signal that the economy is still not out of the woods. Luna: I think that's a perfect way to put it. These calls are like the canary in the coal mine, and the canary is singing the 1970s hits. Lucas: Ha, exactly. And as we keep tracking this, we'll be watching those transcripts for any new euphemisms. Maybe 'demand recalibration' is next. Luna: I wouldn't be surprised. Until next time, keep your ears open.