Research

Menu

Back

Choose Language

October 22, 2021

News

Earnings season gets off to a strong start

Earnings season is now in full swing. On both sides of the Atlantic, companies are expected to report strong profit growth for the third quarter, but risks are higher and investors are eager to hear what they have to say about rising costs, labour shortages and supply chain issues.

Equity investors have been contending with a whole host of worries recently, whether it be congested supply chains, soaring energy costs, rising input prices, labour shortages and now, potential central bank tightening. A positive start to the earnings season last week helped to temporarily push these blues away and global stocks enjoyed their best day in five months.

Bulge bracket banks in the US officially kicked off the reporting, delivering better-than-expected results and upbeat guidance. Credit card data suggested that consumers are loosening their purse strings again, while at the same time, they are not neglecting their bills: Bank of America’s (BoA) loss rates on loans have fallen near 50-year lows. BoA, Wells Fargo and Citigroup all boosted their profits by releasing funds from stockpiles they had built early in the pandemic to guard against a surge in loan defaults that never came to fruition. Wells Fargo released the most — $1.7 billion — while Citigroup released $1.2 billion and BoA released $1.1 billion.

While it seems likely that we may have reached this cycle’s peak earnings growth in Q2 (when the S&P 500 recorded +89% YoY), above average earnings growth is still expected by analysts. Thus far, revisions for Q3 earnings growth on the S&P 500 have moved up from 24.2% growth expected in July, to 28% today. Earnings for Europe’s 600 biggest listed companies are expected to grow 46.7% YoY. With oil prices climbing well above $80 a barrel to their highest in years, the Energy sector had the strongest revisions going into the season, followed by Materials, a key beneficiary of rising commodity prices.

Themes to watch

We are entering the first earnings season of the recovery in which earnings risk clearly exists, emanating mainly from the supply side. What could be equally important as the numbers is what companies say about supply problems, rising input costs and labour shortages in their guidance; key factors that influence inflation prints.

Supply chain issues: Companies are having a hard time satisfying an unprecedented spike in demand, regardless of industry. We are seeing a broad based supply shortage and even if matters do not appear to be worsening, business sentiment surveys suggest that just like carrying a shopping bag, the longer companies have to manage these issues, the heavier they become. As a result of the global chip shortage, Apple has had to revise down its iPhone 13 production targets for 2021 by 10 million units while the chief executive of Dutch health technology company Philips blamed "chips and ships" as it cut its financial outlook with a shortage of electronic components and a lack of shipping containers hampering production and delivery.

Rising costs: When constrained supply and strong demand collide, the result is higher prices. As the economic reopening ensues, countries are resource hungry and Bloomberg’s Commodity Spot Index has been pushed to new all-time highs. Shareholders want to know if companies can pass on these costs to consumers, otherwise future margins could be compressed. Pepsi’s CFO, for example, has already said that the company will be raising prices to offset higher commodity, transport and supply chain costs. Companies can only do this if they have sufficient pricing power. In their favour is the fact that household finances improved during the health crisis. US consumers, for example, are still sitting on around $2.4 trillion in excess savings that were amassed during lockdowns.

Increasing wages: The pandemic was also a major setback for human capital accumulation. Companies are facing labour shortages and as a result, we have seen wages increase over the last year as they compete for staff. Again, this could put pressure on  profit margins in the coming quarters if companies cannot increase their prices.

There is a risk that these factors could already result in earnings misses in certain sectors and if so, it will be interesting to see if investors respond to supply based EPS misses the same way they respond to demand based EPS misses. Also interesting, will be the signals companies send regarding these factors as they are meaningful for the inflation outlook. Already inflation, hit a 13-year high in the euro zone last month, while it has been above 5% in the US for fourth consecutive months. For now, major central banks are cautiously upholding their view that inflation will prove transitory. This earnings season will give clues as to whether companies are muddling through what they see as temporary disruptions or whether they are actually changing their pricing and wage policies, which could lead to more permanent price pressures. In turn, this may prompt central banks to raise interest rates sooner than expected. Already, in the UK, a hike is expected as soon as next month and markets are pricing in more than 25bps in the US for September 2022.

As of now, we are still overweight equities, believing that even if inflation is increasingly mentioned by CEOs, at this point it is not cancelling out demand, nor is it meaningfully eating into margins which are supported by a still-strong macroeconomic backdrop. However, in such an environment, sector selection is crucial - we currently give preference to sectors that typically benefit from increasing rates and inflation – namely energy, materials and financials. We are reluctant on bonds which are already being pressured by an anticipated reduction in central banks’ asset purchases.

Disclaimer

All financial data and/or economic information released by this Publication (the “Publication”); (the “Data” or the “Financial data and/or economic information”), are provided for information purposes only, without warranty of any kind, including without limitation the warranties of merchantability, fitness for a particular purpose or warranties and non-infringement of any patent, intellectual property or proprietary rights of any party, and are not intended for trading purposes. Banque Internationale à Luxembourg SA (the “Bank”) does not guarantee expressly or impliedly, the sequence, accuracy, adequacy, legality, completeness, reliability, usefulness or timeless of any Data. All Financial data and/or economic information provided may be delayed or may contain errors or be incomplete. This disclaimer applies to both isolated and aggregate uses of the Data. All Data is provided on an “as is” basis. None of the Financial data and/or economic information contained on this Publication constitutes a solicitation, offer, opinion, or recommendation, a guarantee of results, nor a solicitation by the Bank of an offer to buy or sell any security, products and services mentioned into it or to make investments. Moreover, none of the Financial data and/or economic information contained on this Publication provides legal, tax accounting, financial or investment advice or services regarding the profitability or suitability of any security or investment. This Publication has not been prepared with the aim to take an investor’s particular investment objectives, financial position or needs into account. It is up to the investor himself to consider whether the Data contained herein this Publication is appropriate to his needs, financial position and objectives or to seek professional independent advice before making an investment decision based upon the Data. No investment decision whatsoever may result from solely reading this document. In order to read and understand the Financial data and/or economic information included in this document, you will need to have knowledge and experience of financial markets. If this is not the case, please contact your relationship manager. This Publication is prepared by the Bank and is based on data available to the public and upon information from sources believed to be reliable and accurate, taken from stock exchanges and third parties. The Bank, including its parent,- subsidiary or affiliate entities, agents, directors, officers, employees, representatives or suppliers, shall not, directly or indirectly, be liable, in any way, for any: inaccuracies or errors in or omissions from the Financial data and/or economic information, including but not limited to financial data regardless of the cause of such or for any investment decision made, action taken, or action not taken of whatever nature in reliance upon any Data provided herein, nor for any loss or damage, direct or indirect, special or consequential, arising from any use of this Publication or of its content. This Publication is only valid at the moment of its editing, unless otherwise specified. All Financial data and/or economic information contained herein can also quickly become out-of- date. All Data is subject to change without notice and may not be incorporated in any new version of this Publication. The Bank has no obligation to update this Publication upon the availability of new data, the occurrence of new events and/or other evolutions. Before making an investment decision, the investor must read carefully the terms and conditions of the documentation relating to the specific products or services. Past performance is no guarantee of future performance. Products or services described in this Publication may not be available in all countries and may be subject to restrictions in some persons or in some countries. No part of this Publication may be reproduced, distributed, modified, linked to or used for any public or commercial purpose without the prior written consent of the Bank. In any case, all Financial data and/or economic information provided on this Publication are not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law and/or regulation. If you have obtained this Publication from a source other than the Bank website, be aware that electronic documentation can be altered subsequent to original distribution.

As economic conditions are subject to change, the information and opinions presented in this outlook are current only as of the date indicated in the matrix or the publication date. This publication is based on data available to the public and upon information that is considered as reliable. Even if particular attention has been paid to its content, no guarantee, warranty or representation is given to the accuracy or completeness thereof. Banque Internationale à Luxembourg cannot be held liable or responsible with respect to the information expressed herein. This document has been prepared only for information purposes and does not constitute an offer or invitation to make investments. It is up to investors themselves to consider whether the information contained herein is appropriate to their needs and objectives or to seek advice before making an investment decision based upon this information. Banque Internationale à Luxembourg accepts no liability whatsoever for any investment decisions of whatever nature by the user of this publication, which are in any way based on this publication, nor for any loss or damage arising from any use of this publication or its content. This publication, prepared by Banque Internationale à Luxembourg (BIL), may not be copied or duplicated in any form whatsoever or redistributed without the prior written consent of BIL 69, route d’Esch ı L-2953 Luxembourg ı RCS Luxembourg B-6307 ı Tel. +352 4590 6699 ı www.bil.com.

Read more


More

December 9, 2024

Weekly Insights

Weekly Investment Insights

  December is here, and while the cold, dark days may not be everyone's cup of cocoa, the festive spirit is starting to set in....

December 2, 2024

Weekly Insights

Weekly Investment Insights

  In an age where you can carry a computer, music player, phone, TV, camera, calculator and notebook all in one small device that fits...

November 25, 2024

Weekly Insights

Weekly Investment Insights

  After last week's disappointing Eurozone economic data, another ECB rate cut in December is high on the wish list for Europe, with investors increasing...

November 22, 2024

BILBoard

BILBoard December 2024 – Red Sweep

    At BIL, we are long-term investors guided by stable, strategic asset allocation guidelines. However, our investment strategy itself is a living, breathing thing,...

November 18, 2024

Weekly Insights

Weekly Investment Insights

  Less than two weeks after the US Presidential election, Trump has made significant progress in nominations for top government posts, leading to some market...

All articles