When I look at the opportunity, it’s all about how well corporate America has done in terms of increasing profit margins. We’re at record levels now, so the revenues have come back, but all the costs haven’t come back. And that means tremendous earnings growth. That’s the positive.

The negative is we are seeing budding cost pressures from a whole bunch of different sources, one being input costs. So, the raw materials are significantly higher. The second is transportation. We had just-in-time inventories, and when we hit the pandemic just-in-time wasn’t in time. And so, we’ve had massive delays. I bought a bike earlier this year; six months later, I’m still waiting for my bike to come from China.

The auto industry is seeing the exact same thing, the auto sales on an annual rate for the most recent month, 12 million cars, we should be selling 17 or 18 million cars annually. We just can’t get the chips. So, that’s the bad news. And you’re going to see that in the revenue line for a number of companies in the third quarter and the fourth quarter.

But today’s deferred demand means future growth in 2022 and 2023. So, we’re elongating the ride, which from an equity market perspective is a great thing.

And then finally on the labor side, it’s wonderful to see—particularly the lower end—get paid more. They certainly deserve it after all these years. But the bigger problem is you just can’t find the workers. In our country we have 11 million open jobs, and I think all companies are going to be paying more, which leads to a real issue. If you start to get a margin squeeze, how do you as a company manage that?

And that really gets to the topic of, do you have pricing power? If you have pricing power, you’re going to be able to keep those really strong margins. If you don’t, I think we’re going to see a little bit of a margin squeeze, and that’s going to truly differentiate between the winners and the losers.

But what we saw through the pandemic over the last 18 or 24 months is good management teams figure it out. So more than ever, if you believe that we’re going to have a few bumps here or there, invest with great management teams, because they’ll figure out how to maximize the opportunity and get you to the other side of any speed bump.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

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