It’s the most wonderful time of the year – Q3 2021 earnings kick off week. We believe that it’s a make-or-break quarter with all eyes on margins and supply chains and for the first time in a while, we won’t just be focusing on management commentary. This is basically the first quarter since before the crisis, where tangible results will help paint a Bob Ross photo of the current environment for companies, specifically surrounding the effects on cost input pricing and supply chain woes. Given this we believe that we could see some extreme volatility amongst different names, whereas previously given everything surrounding COVID, most companies had received a “free pass” on earnings misses – that should not be the case this quarter.
On an individual stock level, the three main things that we will be focusing on this quarter is:
- Is inflation still helpful to EPS at the index level? Or are supply chain shortages at the point of reversing the EPS recovery trend?
- Are investors going to react to supply chain misses the same way they react to demand weaknesses? Or will the “extending the cycle” narrative win out?
- Is Q3 2021 the “peak supply chain stress” or will the market start pricing in that this will last longer…
Overall, we will continue to be watching EPS revisions at the index level for 2021. The market has continued to see GDP expectations come down, given supply chain woes, yet index EPS expectations haven’t budged. This leads us to the conclusion that either analysts or management teams have been shy about lowering estimates or pre-releasing estimates, or earnings are in better shape than the market fears despite historic supply chain headwinds.
Moving in 2022, EPS expectations have continued to rise – at the beginning of the year, the S&P 500 earnings were slated for $195, now they sit closer to $220. The interesting part about this is how the market is viewing the 2022 landscape in light of supply chain issues – basically as if it will not be a problem (and not to mention the potential effects of taxes). Is supply chain a short-term issue that will improve in 2022 (helping earnings)? Is it something more permanent that could impact EPS growth for a few years? These are the two potential narrative outcomes of earnings season – we’ll find out shortly!
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