U.S. earnings seen strong, but supply chains and costs worry investors

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NEW YORK (Businesshala) – Investors are primed for another period of strong US profit growth as the third-quarter report from Corporate America begins next week. But as businesses continue to emerge from the coronavirus pandemic, new problems are emerging that are taking center stage for Wall Street, including supply-chain disruptions and inflationary pressures.

FILE PHOTO: A trader works on the floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, US, September 24, 2021. Businesshala / Andrew Kelly

In the earnings season, many companies have issued a downbeat outlook. FedEx Corp. said labor shortages pushed up wage rates and overtime spending, while Nike Inc. blamed supply-chain shortfalls and rising freight costs as it lowered its fiscal 2022 sales forecast and pushed up the holiday season. warned of delay.

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“Growth is slowing, but still at a meaningful level,” said Terry Sandven, chief equity strategist at US Bank Wealth Management. With product and labor shortages and inflationary pressures, “we would like to see to what extent demand holds up, and what this means for the significant holiday spending period.”

Analysts see a 29.6% year-over-year increase in earnings for S&P 500 companies in the third quarter, down from 96.3% growth in the second quarter, according to IBES data from Refinitiv. Forecasts for the third quarter are down slightly from several weeks ago, a reversal of the trend from recent projections.

Third-quarter earnings growth was always expected to be much lower than second-quarter blowout gains, when companies had a much easier time than a year ago due to the pandemic.

“We were moving at such a high clip. The positive revision momentum is gone,” said Nick Raich, CEO of independent research firm The Earning Scout.

Earnings season kicks off this week with the big banks including JPMorgan Chase.

Watch Third American Earnings Increase 30% for Analysts Graphic:

supply chain cost

Investors are weighing the impact of increasingly higher energy costs on businesses and consumers following the recent surge in oil and natural gas prices. While higher energy prices should be a boon to energy producers, they are an inflationary risk for many other companies such as airlines and other industries and cut into consumer spending.

US companies have kept profit margins at record levels so far this year as they cut costs and passed on higher prices to customers. Some investors are eager to see how long this can last.

After a weak and volatile quarter of September, the third quarter earnings are coming in with volatility in the market. In September the S&P 500 posted its biggest monthly percentage drop since the start of the pandemic in March 2020. It was also the index’s first monthly decline since January.

Analysts are skeptical about how much it’s worth.

“Supply chain issues related to COVID have spread beyond consumer goods. Long-term signs of global friction are easy to spot, Savita Subramaniam, Head of US Equity and Quantitative Strategy at BofA Securities, wrote in a note on Friday. But she said these issues are far from being entirely priced in shares.

Morgan Stanley analysts say the supply-chain constraints facing companies don’t fully value even consensus earnings expectations, making it very difficult for companies to exceed estimates at the same rate as in recent quarters. It is done.

“Consumer discretionary companies of all kinds are right in the cross hairs of supply constraints, high logistics costs and high labor costs,” he wrote. Those strategists see the equity market set for a major pullback, and say third-quarter earnings could determine how deeply the stock market falls.

Reporting by Carolyn Valetkevich in New York; Editing by Megan Davis and Matthew Lewis

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