U.S. earnings seen sturdy, however provide chains and prices fear traders By Reuters

By Caroline Valetkevitch

NEW YORK (Reuters) – Traders are primed for one more interval of sturdy U.S. revenue progress as third-quarter reviews from Company America movement in beginning this week. However as enterprise continues to emerge from the coronavirus pandemic, new issues are arising which are taking heart stage for Wall Road, together with supply-chain snags and inflationary pressures.

Within the run-up to earnings season, a variety of corporations have issued downbeat outlooks. FedEx Corp (NYSE:) mentioned labor shortages drove up wage charges and additional time spending, whereas Nike Inc (NYSE:) blamed a supply-chain crunch and hovering freight prices because it lowered its fiscal 2022 gross sales estimate and warned of holiday-season delays.

“The tempo of progress is decelerating, however nonetheless it is at a significant degree,” mentioned Terry Sandven, chief fairness strategist at U.S. Financial institution Wealth Administration. With the product and labor shortages and inflationary pressures, “we’ll be trying to see to what extent demand is there, and what does it imply for the essential vacation spending interval.”

Analysts see a 29.6% year-over-year improve in earnings for corporations within the third quarter, in line with IBES knowledge from Refinitiv as of Friday, down from 96.3% progress within the second quarter. The third-quarter forecast is down a contact from a number of weeks in the past, a reversal of the latest development for estimates.

Third-quarter earnings progress was at all times anticipated to be a lot decrease than the blowout achieve of the second quarter, when corporations had a lot simpler year-ago comparisons due to the pandemic.

“We had been going up at such a excessive clip. The constructive revision momentum has lapsed,” mentioned Nick Raich, CEO of impartial analysis agency The Earnings Scout.

Earnings season is kicking off this week with the massive banks together with JPMorgan Chase (NYSE:).

Analysts see Q3 U.S. earnings progress of 30% https://graphics.reuters.com/USA-RESULTS/OUTLOOK/zjpqkekqxpx/chart.png

SUPPLY CHAINS, COSTS

Traders are weighing the impression of sharply increased power prices on companies and customers after a latest surge in oil and costs. Whereas increased power costs must be a boon for power producers, they’re an inflationary danger for a lot of different corporations like airways and different industrials and minimize into shopper spending.

U.S. corporations have up to now this yr saved revenue margins at document ranges as a result of they’ve minimize prices and handed alongside excessive costs to prospects. Some traders are anxious to see how lengthy that may go on.

Third-quarter earnings arrive with the market nonetheless wobbly after a weak and unstable September. The S&P 500 in September registered its largest month-to-month share drop for the reason that onset of the pandemic in March 2020. It was additionally the index’s first month-to-month decline since January.

Analysts are skeptical about how a lot is priced in.

“COVID-related provide chain points have unfold past shopper items. And longer-term indicators of world friction are simple to seek out,” Savita Subramanian, head of U.S. fairness & quantitative technique at BofA Securities, and different BofA strategists wrote in a observe on Friday. These points are removed from being absolutely priced into shares, they wrote.

Additionally, whereas provide chain points have grabbed investor consideration, wage inflation is “simply as large of a headwind (if not larger,” BofA strategists wrote in a observe Monday. Steerage from corporations “might be ugly,” they added.

Morgan Stanley (NYSE:)’s analysts say that consensus earnings expectations additionally haven’t absolutely priced within the supply-chain constraints dealing with corporations, making it a lot tougher for corporations to surpass estimates on the similar fee as in latest quarters.

“Shopper Discretionary corporations of all types are proper within the cross hairs of the availability shortages, increased logistics prices and better labor prices,” they wrote. These strategists see the fairness market set for an even bigger pullback, and say third-quarter earnings might decide how deeply the inventory market dips.