Commentary Directory

The Week Behind

Companies have been reporting Q3 2021 earnings for the past few weeks now, updating on how supply disruptions have affected various industries. With the macro environment that had developed over the summer, many analysts were worried there could be some disappointment in Q3 numbers especially with input costs rising and labor shortages persisting. However, their doubts have mostly been proven wrong as firms' bottom lines were resilient.

According to FactSet, 81% of S&P 500 companies have reported a positive EPS surprise, and 75% have reported a positive revenue surprise with 92% reporting. The blended earnings growth rate (earnings growth for those who have reported plus the estimate for those who are still to report) is 39.1% for Q3 2021 which would be the 3rd highest annual rate of earnings growth since 2010. While this is not as strong as Q1 at 49% YoY and Q2 at 92% YoY, it is a strong showing in the context of supply constraints.

This hasn't stopped discussions of inflation cropping up in earnings call. In fact, "inflation" seemed to be a bit of a buzzword coming up 285 times in S&P 500 earnings transcripts, the most in the last times and more than twice the 5-year average. There are still 40 more Q3 calls yet to happen. It's not much of a surprise that inflation has become an issue, but it may be a surprise that companies are managing their bottom lines so well in the face of it. Of course, we have seen that those costs are coming through to consumers finally, but PPI is still significantly higher than CPI even in the latest October report: headline CPI at 6.2% and core CPI at 4.6% vs headline PPI at 8.6% vs core PPI at 6.2%.

This hasn't weighed on margins as much as it typically might because demand is still experiencing strength from excess savings and the pent-up consumer activity that has been released by restrictions. Invesco reports that the S&P 500 so far is reporting a net profit margin around 12.9% which is near a record-high. Prospects for Q4 margins look solid so far as well, forecasted at 11.8%, only a slight decrease expected from Q3 even though inflationary pressures seem likely to remain harsh.

Consumer activity during the holiday season will likely help out many companies that have been forced to raise prices. Many retail surveys point to households spending around the same as 2019 if not slightly more, but they have also planned to start spending earlier than usual. This may push have pushed some firms' revenue to the back end of Q3 that may have typically come through in early to mid Q4. It's speculation but something to consider.

Regardless of how the holidays go, more demand is being spoon-fed to US companies in the form of the infrastructure bill just recently passed in November 2021. This is especially true for the Industrial and Energy sectors which are projected to see earnings growth spike. In particular, Fidelity points to expectations of 37% and 30% YoY forward EPS growth for Industrial and Energy companies respectively.

Despite what headlines are telling you about supply disruptions, US corporations found a way to excel in Q3. Post-pandemic business optimism appears to be in store for 2022, but that could come at the cost of the consumer. Although, excess savings should dampen the pain. There are plenty of reasons to be bullish on US businesses, and earnings last quarter are a big reason why.

Chart of the Week

S&P 500 net profit margins have held up well in Q3 2021 despite the CPI-PPI spread turning lower due to elevated input cost inflation.

The Week Ahead

Wednesday is the day to watch with lots of economic data to chow on before moving on to another feast on Thursday. Durable goods orders and another GDP update are the big ones with some interesting economic footnotes provided by new home sales and UMich's consumer survey. Likely not enough to shift views on supply disruptions and get equities out of the rut they have fallen in.