Inflation's positive impact on corporate earnings growth has dwindled and costs are starting to hurt margins, Morgan Stanley says

• Inflation is no longer a net positive for earnings growth, Morgan Stanley said Monday.
• Costs pressures and pain for consumers from higher food and gas prices are starting to hurt margins.

Inflation is no longer serving as a boost to US corporate earnings as companies contend with cost pressures and pain for consumers amid further price spikes resulting from Russia's war against Ukraine, according to Morgan Stanley.

The "positive effects of inflation on earnings growth have reached their peak and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to remain max hawkish," wrote Morgan Stanley's US equity strategy team led by Michael Wilson in a research note published Monday.

Headline inflation in March accelerated to 8.5% year-over-year, the fastest increase since December 1981. A pick-up in prices for gas, shelter, and food contributed to pushing the reading up from 7.9% in February. The Federal Reserve in March began raising interest rates to bring down high consumer prices and its tightening cycle is expected to be long and aggressive.

Companies have been able to raise their prices but higher costs are now showing up in margins, the investment bank said. It noted input cost expenses "are off the charts" as are transport and warehousing expenses.

"Secondarily, the war in Ukraine has led to a spike in energy and food costs which serve as nothing more than a tax on a consumer that is already struggling with high inflation," said Morgan Stanley. Prices for oil and other commodities have soared in the wake of the war against Ukraine launched in late February by Russia, a major producer of natural resources.

The bank said signs are emerging that the first-quarter earnings season "may be more disappointing than thought", particularly from a guidance/forward estimate standpoint.

"Given the host of risks companies face (cost pressures, payback risk in consumer demand, the Russia/Ukraine conflict) we think this downward move in revisions should play out again" into the current reporting season.