Behind plexiglas, a trader is working on the New York Stock Exchange’s floor in New York City. This was July 28, 2021.
Today marks the traditional beginning of third-quarter earnings. The good news is that business is booming. High demand is for almost all goods and services.
The bad news is that this quarter will be difficult to model due to supply chain problems, shortages of labor, and rising energy prices.
Peter Tchir of Academy Securities’ macro strategy, said to me: “This could prove to be a difficult quarter.” There is real concern about inflation running hot. This could reduce the consumer’s ability to spend even though there may be stronger demand.
Although today marks the traditional start to earnings season for big banks, such as JPMorgan, there are 22 earnings reports that companies have filed, including some with quarters ending in August. Because these reports can be used as an indicator for future earnings and guidance, strategists and analysts watch them closely.
Two problems exist:
1. Early reporters don’t beat estimates as much anymore.Nick Raich of The Earnings Scout, CEO, stated that 22 companies who are early reporters are exceeding estimates by 11%. Although this beat beat exceeds the traditional beat of 3 to 5% it still falls far short of the beats in previous quarters and the approximately 18% beat for this quarter.
2. These early reporters don’t provide as much guidance as they did last quarter.Accordingly, analysts don’t raise estimates as aggressively in the current quarter as they did previously.
Is there something going on?
Raich explained to me that “the positive estimate revision for 2021 has slowed significantly because of rising inflation, supply chain issues and other factors.” “Companies don’t seem as optimistic now as they did three- to six months back.”
The result is that earnings growth has slowed in recent quarters. For example, third-quarter earnings estimates have been steadily rising for several months, but they have slowed in the past few weeks.
S&P 500 Q3 earnings estimates
(Year over year)
July 1 up 24.7%
Oct. 1 up 29.4%
Oct. 8 up 29.6%
Tony Dwyer (chief market strategist, Canaccord Genuity), told me that although it was going to be turbulent, some of the information has been transmitted by the wider market. His observation was that all three cyclicals, Financials and Industrials, Materials and Energy had underperformed throughout the summer. It was the summer of indigestion and markets had been telegraphing that it would be difficult to earn earnings.
Dwyer indicated that the economy is now in a mid-cycle phase. This period sees earnings growth peak, while price-earnings ratios drop and big market gains made during the “early cycle” phase turn into modest or reversed gains.
This has happened: The forward multiple on the S&P 500 has gone from roughly 23 to 20, and the S&P 500 is 4% off its high of six weeks ago.
He said that “the average stock, especially in the cyclical sector, has already reacted” to the transition between early and mid-cycle.
Dwyer explained to me that if we’re consistent with the previous phases of transition, then you can buy weakness.
Other people are afraid that the disruptions may last for longer than they anticipate, and outstrip the current high demand.
The most prominent culprit in this quarter’s earnings woes is NikeWhich? reported earnings Sept. 23This is a. Although earnings were slightly higher than anticipated, revenue disappointed. According to the company, supply chain issues, which included 10 weeks of lost production in Vietnam, where 40% of their shoes are made, and longer shipping times significantly affected its ability to deliver products.
The company stated at the same time that the demand for their products was exceptional, and included a record North American back-to-school season.
Nike shares dropped approximately 6% upon the release of the report. But, they have since recovered almost all their losses. Investors believe that strong customer demand is more important then temporary disruptions to supply chains.
Investors are concerned that supply chain disruption and increased cost will be the norm for companies during the third quarter.
Imagine if it were, AppleA Nike representative pulls out an iPhone and states that they are unable to deliver enough iPhones.
It’s that simple. Bloomberg News was reportingLast night, the company stated that it was going to reduce iPhone 13 production targets by 2021 because of chip shortages.
Peter Tchir said to me that there is a possibility that Apple could have found a solution.
Tony Dwyer however insists that the announcement itself will have no long-term effects.
“Who hasn’t heard that there is a shortage of labor, supply chain issues, and a semiconductor crunch?” He inquired.
The question is not how long it will last but when it is going to be discontinued.
Peter Tchir believes that the chip shortage will not be a problem for long, although it isn’t clear how much longer this market will last.
He said that people overestimate the future demand. Everyone assumes that the demand will come when there is supply. Is it possible that the demand may be exaggerated by current buying habits? You could be seeing shortages reports that have pulled the market forward.
He said that assuming demand will be available in the next few months was a risk. The opposite problem could be happening: Instead of a shortage, there is an increase in inventory.
“It’s definitely going to be an interesting few months.”