(Yahoo!Finance) - Supply crisis and energy may still bite
We’re knee-deep into the third quarter earnings season, and thus far results are mostly defying the implications of ships idling in the Pacific Ocean staked to the brim with goods they can’t deliver — or an outraged public wielding digital pitchforks.
Unless your name is Robinhood (HOOD) (a pox on those mercurial retail traders) — but certainly if you’re the high-flying technology stocks like Alphabet (GOOG), Microsoft (MSFT) and Facebook (FB)— you’re among the lucky group beating Q3 expectations by a mile.
In fact, of the more than 140 S&P 500 companies that have reported earnings thus far, nearly 82% of them have beaten Wall Street’s estimates, according to Refinitiv data. That’s well above the historical average of 66%, the firm notes, even though the ratio of negative pre-announcements to positive ones (0.8) is running well below the long-term average (2.6).
Given the worries that foreshadowed the Q3 reporting season, it’s almost enough to make you ask the question: What supply chain crisis?
The struggle to deliver goods and services — and to hire enough bodies to accomplish the task — is certainly writ large. Retailers and consumers alike are getting increasingly antsy about the holiday season, especially with inflation rearing its head — which was enough to hammer stocks in September, one of the most volatile months this year.
Yet, it's undeniable that companies are doing better than expected, and there are at least a couple of salient reasons behind this. So what’s going on?
"The market has rebounded pretty significantly, especially given September's performance in the equity markets," Gargi Chaudhuri, head of iShares investment strategy at BlackRock, told Yahoo Finance on Tuesday. "What we're focusing on more recently is... more of that reflationary theme [playing] out in the market."
So are we free and clear from the inflationary and supply chain worries that were giving investors the vapors only weeks ago?
Well... not entirely.
Over at Deutsche Bank, chief equity strategist Binky Chadha recently crunched the Q3 numbers, and found some noise in otherwise strong results. As it turns out, the stellar performance of big banks was largely attributed to the release of loan-loss reserves that Wall Street thought it needed to cushion the blow of COVID-19.
If you exclude those factors, the headline outperformance of S&P 500 companies in aggregate during Q3 is running at a comparatively tame 8%, well below the current levels over 80%. The median results are even less impressive, checking in at 5.2%.
“At the moment, our team sees earnings on track to being flat to down sequentially by -0.2% to -2% [quarter-over-quarter, seasonally adjusted in Q3], marking the first drop since Q2 2020,” Deutsche Bank economist Jim Reid wrote this week.
Meanwhile, keep an eye on sales growth, which the bank estimates has slowed to a near crawl in Q3: Deutsche thinks margins will drop, squeezed by rising inflation and ancillary costs. And soaring energy prices, which have sparked rising chatter about a 1970s-style oil shock and stagflation, aren’t likely to improve the outlook, either.
“Forward consensus estimates have risen modestly, but mostly due to higher oil prices. Excluding energy, estimates for [the fourth quarter] and 2022 are down slightly,” Reid said.
All told, it means the economy — and corporate America — isn’t out of the woods just yet. Keep one eye on Q3 earnings, but the other on guidance for Q4 and the upcoming calendar year.
By Javier E. David
Editor focused on markets and the economy
