Stocktake: All eyes on margins and supply chain

First US earnings season in recovery overshadowed by clear risk

Inventory shortages hurt Nike shares last month, while Apple is reportedly poised to cut iPhone 13 production targets due to chip shortages. Photograph: Michael Nagle

Inventory shortages hurt Nike shares last month, while Apple is reportedly poised to cut iPhone 13 production targets due to chip shortages. Photograph: Michael Nagle

 

Investors and analysts will be keeping a close eye on US earnings season, which kicked off in earnest last week.

S&P 500 earnings are projected to rise 27.6 per cent. That sounds high, until one remembers earnings soared 52.8 and 92.4 per cent in the first and second quarters of 2021. Earnings growth is inevitably slowing, although steep valuations mean investors are hoping any slowdown won’t be too marked.

Companies invariably beat expectations. FactSet data shows that, over the last five years, US earnings have topped expectations by 7.2 per cent. A repeat performance would result in third-quarter earnings growth of almost 35 per cent.

Stellar rally

2021’s stellar rally and high valuations mean even that may not satisfy investors, cautions DataTrek Research’s Nicholas Colas, who reckons stocks may sell off unless overall earnings top estimates by “at least” 10 per cent.

That may be tricky. Early reports indicate companies are not beating estimates as they did in recent quarter. Guidance has been low-key, with many companies reporting supply-chain disruptions. Inventory shortages hurt Nike shares last month, while Apple is reportedly poised to cut iPhone 13 production targets due to chip shortages.

It could be a “make-or-break quarter”, says Bank of America’s Savita Subramanian, “with all eyes on margins and supply chain”. That’s echoed by Raymond James analysts. This is, they say, the “first earnings season in the recovery where earnings risk clearly exists”.

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