Investors Watch for Rising Costs in Earnings This Week

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JPMorgan Chase, Delta Air Lines, UnitedHealth and Domino’s Pizza are among the companies prepared to report

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Big US companies reporting this week include JPMorgan Chase & Co, Delta Air Lines Inc.,

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UnitedHealth Group Inc.

and Domino’s Pizza Inc.

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“This is going to be a difficult and confusing result that many companies expect to see analysts expect for revenue and operating profit margins,” said Anik Sen, global head of equities at Pinebridge Investments.

Analysts expect earnings for companies in the S&P 500 to rise 28% in the third quarter compared to a year ago – at a time when businesses were reeling from the effects of the pandemic.

But as countries emerge from the restrictions of the pandemic, bottlenecks in global supply chains are leading to shortages of components needed to produce finished goods. Rise in raw material cost is also putting pressure on the profits of the manufacturers.

Wall Street is betting that the disparity of the pandemic’s recovery has eroded the company’s profitability: Net profit margins for the S&P 500 are forecast to come in at 12.1% for the third quarter, well below a record. According to FactSet, 13.1% in the previous quarter.

Still, strategists at Morgan Stanley say they don’t believe that supply-chain problems are fully factored into market expectations for corporate earnings—and if they’re right, some will in the coming weeks. Unpleasant surprises can happen.

Holly Macdonald, chief investment officer at Bessemer Trust, said, “If they’re going to have to pay more and they’re unable to pass it on to end buyers or consumers and it’s impacting profitability, that’s something that will be concerning. “

In recent weeks, investor concerns over inflation, rising government bond yields and a possible ripple effect from China Evergrande Group‘s

Missed loan payments have sent major indices oscillating.

The turbulence has left the S&P 500 up 17% in 2021, down from a year-over-year gain of 21% in its early September record. The pullback has been intensified by a return in stocks of companies that said their results were coming under pressure.

after fedex Corporation

Last month reported lower-than-expected earnings and cut its financial outlook, with a company executive saying the labor market was the biggest issue facing the delivery giant. Shares fell 9.1% the next day and then settled lower for six more sessions.

nike Inc.

Shares fell 6.3% in the trading session, as the sneaker company reported lower revenue than analysts had forecast. An executive told analysts that Nike had lost weeks of production in Vietnam due to the Covid-19 lockdown and the time required to transport goods from Asia to North America had doubled from before the pandemic.

In smaller companies, Bed Bath & Beyond Inc.

It cited pandemic-induced fears of supply-chain problems, inflation and in-person shopping when it reported a sharp drop in quarterly sales. Shares of the home goods retailer fell 22% that day.

There’s good news for many analysts and portfolio managers: Recent declines have helped keep stocks looking undervalued. The S&P 500 traded Thursday at 20.6 times its projected earnings over the next 12 months, well above the five-year average of 18.6 times, but lower than the 22.8 multiple at the end of last year.

Although volatility has irked some investors, money managers have noted that it is normal for stocks to pull back. Kimberly Woody, senior portfolio manager at Global Investments, said she has been getting calls from clients about moves of a few percentage points.

“It shows the complacency out there and the idea that the stock market is like an ATM machine,” she said. “Volatility, it’s raised, but it’s nothing compared to what we’ve seen in the past.”

Karen Langley at [email protected]

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