October baseball is in full swing. With two post-season wildcard games settled, the first few rounds of the division series have begun. Baseball fans refer to this time of the year as October baseball, a signal that baseball season, and the year, are coming to a close. By November, the championship series will be settled, and the world series will close out. On a similar note, October also marks the start of the final quarter of the year, and along with it, the release of the last earnings reports covering the 3rd quarter of 2021.
Several issues have carried over from the previous quarter. If a company has been impacted, its earnings will surely reflect it. Among those issues are continued supply chain constraints, labor market recovery, inflation, and central bank monetary policy.
Companies and consumers – domestic and abroad – have felt the impact as orders placed have significant delays, limited inventories have resulted in higher prices paid by manufacturers and received by consumers. In addition, the limited supply of storage containers available for shipping has also hindered deliveries. As a result, some companies are opting to contract their own shipping vessel to limit the impact on their supply streams. Still, companies are benefiting from the constraints. For example, some shipping companies have reported an increase in hirings as demand for these companies remains elevated, which brings me to my next point.
The labor market, as of recently, has been of major attention for the central bank. The central bank’s dual mandate, maximum employment, and stable prices set the stage for monetary policy changes. Last month, central bank officials noted that the first condition for rate hikes, stable prices, have been met. The last determinant then is the state of the labor market recovery. Last week’s employment report came in well below expectations. But, not all is as bad as headline figures show. In the same labor report release, the previous two months’ data was upwardly revised. Not to add that the labor report is adjusted for seasonal hiring, which can make reported data weaker than it is.
Outside of supply chain constraints and conditions in the labor market, monetary policy changes are what most investors are keeping a close eye on. The labor market and supply chain issues are likely to take some time to normalize. But, any changes in the central bank’s monetary policy will be seen immediately as fixed-income investors adjust their positioning. Fixed income market movements have long been seen as a gauge of future market conditions. That is, if fixed-income market investors think that yields will move higher, then yields for fixed-income investments will also move higher, as selling of those securities lowers their price but increase their yields. So, we can see why yields have been on an upward trend over the last month as central bank officials have commented that quantitative easing measures will be reduced. This is important to note because some companies, such as tech, are sensitive to interest rate increases due to the rise in their cost of capital.
Given the issues mentioned above, we can expect some company’s earnings to be impacted. In fact, a small portion of S&P 500 companies have already released earnings for the 3rd quarter -but the first of the heavy hitters at-bat for 3rd quarter earnings releases, banks, are the real start to the earnings season with other major players releasing their earnings shortly after. According to Factset, of the twenty-one companies that have released their earnings for the 3rd quarter, the major issues impacting earnings are supply chain disruptions, labor costs & shortages, and increased transportation and raw materials costs. Regardless, data from Factset shows that the S&P 500 is expected to report earnings growth of more than 30% for the 3rd straight quarter on a year-over-year basis. Part of this increase has to do with the lower base from a year ago as covid heavily impacted earnings at the time. Yet, earnings forecasts for the 4th quarter of 2021 also show double-digit growth, albeit at a slower pace of 21.8% earnings growth on a year over year basis and revenue growth at 11.5% on a year over year basis.
During the upcoming week nineteen more companies are scheduled to report results for the third quarter. Given that some of the companies have already mentioned these issues, it is likely that the remaining companies will also make similar comments during their earnings calls. But as we see, the expected elevated earnings to be released this quarter will likely make more headroom for the S&P 500 to continue to grow. While these issues may not strike out the S&P 500, S&P 500 companies will likely keep the ball in play.
– Jose Rendon