Earnings are headed for an all-time high, if supply-chain and staffing woes don’t get in the way

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Corporate earnings hit a record high in the first half of 2021, and analysts expect the rest of the year to add yet another record-breaker.

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However, there are some concerns about that path. Namely, the issues the industry is facing as staff shortages affect the supply chain, which could hurt retailers’ ability to get enough goods to sell to consumers this holiday season. .

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As earnings season begins this week, analysts expect the S&P 500 SPX,
-1.42%
Earnings will grow 27.6% year over year, which sounds strong unless you compare it to the previous two quarters – earnings grew 52.8% in the first quarter and 92.4% in the second quarter, as companies battled the COVID-19 pandemic. started of. Those two quarters produced the largest net income on record for a six-month period, according to Dow Jones Markets data, with records dating back to 2008.

Expectations are for the second half — which is typically bigger, thanks to back-to-school and holiday shopping — to generate the biggest gains for the year as well. But companies are starting to panic over supply-chain issues that have popped up and can get in the way of sustained earnings power.

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Don’t miss: The biggest risk facing investors this earnings season lies just below the surface

So far this young earnings season, 21 companies have reported third-quarter earnings, and nearly three-quarters of them — 15 out of 21 — reported supply-chain disruptions in their earnings calls, wrote FactSet senior earnings analyst John Butters. negative effects have been noted. In a note on Friday. Right behind, with 14 out of 21, were employee problems and labor costs, which are considered to be at the heart of supply-chain issues.

Those issues can appear in many places, including the loss of revenue from the inability to obtain goods and services to sell to consumers or companies, but also in the costs that companies must bear. For example, Walmart Inc. Large retailers such as WMT,
+1.42%,
Lakshya Corp. TGT,
+0.61%,
Home Depot Inc. hd,
-0.62%
and Costco Wholesale Corp. Cost,
-1.70%
Have hired their own ships to ensure supplies, which will reflect in their cost and could cut into profits.

Large retailers are hiring ships to address supply chain problems. Will the strategy save Christmas?

For investors, the prospect of supply-chain and staffing issues getting in the way of earnings is no small thing. The S&P 500 is trading well ahead of its five- and 10-year averages for forward price-to-earnings, as Butters pointed out, with a forward P/E of 20.5, although that number is at one of its lowest points. Is. last 18 months.

Butters pointed out that the still-increasing P/E ratio is partly because investors expect companies to outperform on earnings, as they have historically. During the past five years, real earnings for the S&P 500 have exceeded expected earnings by an average of 8.4%, leading to earnings growth rates above the average rate of 7.2% throughout the earnings season. Those numbers have exploded higher over the past five quarters, however, as concerns about the COVID-19 pandemic failed to show in corporate earnings results, with outperformance in that period averaging 19.1%, according to Butters.

Nicolas Kolas, co-founder of Datatrack Research, wrote in a Monday morning research note that companies would need to move closer to number two than number one to see any gains for stocks in the coming months.

For more: Unless earnings clear this bar, 2021 stock-market high is ‘almost certainly’

“The companies in the S&P 500 need to outperform this quarter by a total of 10 percentage points, or the higher levels we almost certainly saw in US equity markets for the year,” he wrote.

With Banks and other early reports, the flood of reports has really begun this week.

Number(s) to watch

“Investors would do well to watch earnings per share carefully, as banks are shifting loan loss reserves they built up in the early days of the COVID pandemic to their bottom line as the economy recovers,” Gelsey wrote. “This practice allows banks to operate within regulatory limits around loan loss reserves, while providing a lift to beat their quarterly EPS estimates.”

Earnings outlook: Will bank stocks continue their wildly rally?

Income from the financial sector is expected to grow more than 17% in the third quarter, while sales are expected to grow at half that rate, at 7.5%. According to FactSet, the banking sub-sector is expected to show a sales growth of only 1.6%, while profit is expected to grow at 22.8%.

The bank’s shares were fairly stagnant in the third quarter as investors made moves. To get another leg up, banks have to prove they can still win the loan business that’s being snatched away by some of the next generation of financial-technology players in the market. See stats and commentary on that dynamic as the season plays out.

Calls to put on your calendar

The trucking industry has been at an extreme pace as goods arriving in ports need to be moved across continents, but staffing issues have become a major concern, as has increased longevity.

“Investor sentiment is increasingly of the belief that each record quarter that passes brings a quarter of the trucking to a peak and inevitable recession; yet, that critical inflection point continues to be pushed to the right, stronger in the long run. There seems to be no end in sight with the freight background,” Evercore ISI analysts wrote last week.

For more information see Friday Morning Earnings from JB Hunt.

Earnings this week

Four of the 30 Dow Jones Industrial Average (DJIA)
-0.49%
Components is on track to report this week, while 18 S&P 500 companies are expected to disclose numbers. Outside of the major indices, Alcoa Corp. Keep an eye on AA,
-2.21%,
Which mattered a lot more than it is now.

Dow Jones Industrial Average Report: JP Morgan Chase & Co. JPM,
-0.12%
(Wednesday); Walgreens Boots Alliance Inc. WBA,
+0.52%
and UnitedHealth Group Inc. UNH,
-1.33%
(Thursday); Goldman Sachs Group Inc. gs,
+0.13%
(Friday)

S&P 500 Report

Tuesday: Fastnal Corp. Fast,
+0.61%

Wednesday: BlackRock Inc. BLK,
-1.98%,
Delta, First Republic Bank FRC,
-3.64%,
J. P. Morgan

Thursday: Bank of America Corp. Bac,
-0.20%,
Citigroup Inc. C,
+0.74%,
Domino’s Pizza, Inc. DPZ,
-1.13%,
Morgan Stanley MS,
-0.49%,
UnitedHealth Group, US Bancorp USB,
+1.12%,
Walgreens, Wells Fargo & Co. WFC,
-0.71%

Friday: Goldman Sachs, JB Hunt, PNC Financial Services Group Inc. PNC,
+0.68%,
Prologis Inc. pld,
-0.06%,
Truist Financial Corp. TFC,
+0.66%

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