Investors Watch Rising Profit Costs This Week


The third-quarter earnings season kicks off this week, as investors watch for signs that rising costs will pose a problem for US corporate earnings this quarter and beyond.

What companies reveal about the impact of any supply chain issues, labor shortages and the continuing pandemic could set the tone for trading, after a month of ups and downs that brought the market down. S&P 500 3.2% from its September record. Already, a handful of companies with names in bold have said they are grappling with the cross-currents of an unusual economic expansion, lowering their shares and raising fears that more surprises await.

Major U.S. companies expected to report this week include JPMorgan Chase & Co., Delta Air Lines Inc.,

DAL -0.69%

UnitedHealth Group Inc.

A H 0.93%

and Domino’s Pizza Inc.

DPZ -0.50%

“The earnings season is going to be tough and confusing ahead,” said Anik Sen, global head of equities at PineBridge Investments, who expects many companies to fall short of analysts’ expectations for revenue and margins. ‘exploitation.

Analysts expect S&P 500 company profits to rise 28% in the third quarter from a year earlier, a time when companies struggled to recover from the effects of the pandemic.

But as countries emerge from pandemic restrictions, bottlenecks in global supply chains are causing shortages of the components needed to produce finished goods. Rising raw material costs are also putting pressure on manufacturers’ bottom lines.

Wall Street is betting corporate profitability has dipped slightly, in part due to uneven pandemic recovery: S&P 500 net profit margin set to hit 12.1% for third quarter, down from record up 13.1% in the previous quarter, according to FactSet.

Even so, Morgan Stanley strategists say they don’t think supply chain issues have been fully factored into market expectations for corporate earnings – and if they’re right, it could. there will be unpleasant surprises in the coming weeks.

“If they have to pay more and they can’t pass it on to end buyers or consumers and it achieves profitability, that will be something that will be of concern,” said Holly MacDonald, Director of Investments at Bessemer Trust. .

In recent weeks, investor anxiety over inflation, rising government bond yields and the potential spillover effects of the China Evergrande group‘s

the missed debt payments rocked the main indices.

The turmoil left the S&P 500 up 17% in 2021, up from a 21% gain since the start of the year to its high in early September. The pullback was exacerbated by the pullback in shares of companies that said their results were under pressure.

After FedEx Corp.

Last month reported lower than expected profits and slashed its financial outlook, a company executive said the job market was the biggest problem the delivery giant was facing. Shares fell 9.1% the next day, then fell for six more sessions.

Nike Inc.

shares fell 6.3% during the trading session after the sneaker company reported lower than analysts’ expected earnings. An executive told analysts Nike lost weeks of production in Vietnam due to Covid-19 lockdowns and the time it takes to transport goods from Asia to North America has doubled compared to before the pandemic .

Among small businesses, Bed Bath & Beyond Inc.

cited supply chain issues, inflation and pandemic-inspired fears of in-person shopping when he reported a sharp decline in quarterly sales. Shares of the housewares retailer plunged 22% that day.

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Good news for many analysts and portfolio managers: the recent pullback has helped stocks look cheaper. The S&P 500 traded Thursday at 20.6 times its projected earnings over the next 12 months, above a five-year average of 18.6 times but down from the multiple of 22.8 that ‘he was in command at the end of last year.

While volatility has baffled some investors, fund managers note that it’s normal for stocks to pull back. Kimberly Woody, senior portfolio manager at Globalt Investments, said she had received calls from clients regarding movements of a few percentage points.

“It speaks to complacency and this idea that the stock market is some kind of ATM,” she said. “The volatility, she picked up, but it’s nothing compared to what we’ve seen in the past.”

Write to Karen Langley at [email protected]

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