U.S. earnings seen sturdy, however provide chains and prices fear buyers By Reuters
© Reuters. FILE PHOTO: A trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, the United States, Sept. 24, 2021. REUTERS / Andrew Kelly
By Caroline Valetkevitch
NEW YORK (Reuters) – Investors are prepared for another period of strong US earnings growth as Corporate America reports for the third quarter arrive starting this week. But as business continues to emerge from the coronavirus pandemic, new issues are emerging that are at the fore for Wall Street, including supply chain hang-ups and inflationary pressures.
A number of companies have given dire outlooks ahead of the reporting season. FedEx Corp (NYSE 🙂 said labor shortages had spiked wage rates and overtime spending while Nike Inc (NYSE 🙂 blamed a supply chain crisis and rising freight costs when it lowered its fiscal 2022 revenue estimate and warned of Christmas delays.
“The pace of growth is slowing, but it is still at a reasonable level,” said Terry Sandven, chief equity strategist at US Bank Wealth Management. In view of product and labor shortages, as well as inflationary pressures, “we will examine the extent to which there is demand and what this means for the important holiday season.”
Analysts see earnings in the third quarter, according to IBES data from Refinitiv on Friday, of 29.6% year-over-year, compared to 96.3% in the second quarter. The forecast for the third quarter is a little lower than a few weeks ago, a reversal of the latest trend for estimates.
Third quarter earnings growth was always expected to be much lower than second quarter blowout earnings, when companies had much easier year-on-year comparisons due to the pandemic.
“We had risen so high. The positive momentum of the revision has evaporated,” said Nick Raich, CEO of the independent market research company The Earnings Scout.
Earning season kicks off this week with major banks including JPMorgan Chase (NYSE :).
Analysts see earnings growth of 30% in the US in the third quarter https://graphics.reuters.com/USA-RESULTS/OUTLOOK/zjpqkekqxpx/chart.png
SUPPLY CHAINS, COSTS
Investors are weighing the impact of soaring energy costs on businesses and consumers following a recent surge in oil and prices. While higher energy prices should be a boon to energy producers, they pose an inflationary risk for many other companies, such as airlines and other industrial companies, and limit consumer spending.
US companies have kept their profit margins at record levels so far this year by cutting costs and passing high prices on to customers. Some investors are excited to see how long this can take.
Third quarter results are coming in as the market still wobbles after a weak and volatile September. In September, the S&P 500 recorded its largest monthly percentage decline since the pandemic began in March 2020. It was also the index’s first monthly decline since January.
Analysts are skeptical of how much is priced in.
“COVID-related supply chain issues have spread beyond consumer goods. And longer-term signs of global tension are easy to find, ”wrote Savita Subramanian, head of US equity and quantitative strategy at BofA Securities, and other BofA strategists in a note on Friday. These problems are far from fully priced into the stocks, they wrote.
While supply chain problems have caught the attention of investors, wage inflation is “an equally big headwind (if not bigger,” BofA strategists wrote in a statement on Monday. Corporate guidelines could be ugly, “added) she added.
Morgan Stanley (NYSE 🙂 Analysts at (NYSE 🙂 say the consensus earnings expectations have also not fully priced in the supply chain constraints businesses are facing, making it much more difficult for businesses to make estimates at the same pace as in to surpass the last few quarters.
“Non-cyclical consumer goods companies of all kinds are in the middle of the crosshairs of delivery bottlenecks, higher logistics costs and higher labor costs,” they wrote. These strategists see the stock market poised for a bigger retreat and say third quarter earnings could determine how deep the stock market falls.