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U.S. earnings seen strong, but supply chains and costs worry investors

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A dealer works on the ground on the New York Inventory Change (NYSE) in Manhattan, New York Metropolis, U.S., September 24, 2021. REUTERS/Andrew Kelly

NEW YORK, Oct 11 (Reuters) – Buyers are primed for an additional interval of robust U.S. revenue development as third-quarter experiences from Company America circulation in beginning subsequent week. However as enterprise continues to emerge from the coronavirus pandemic, new issues are arising which can be taking heart stage for Wall Avenue, together with supply-chain snags and inflationary pressures.

Within the run-up to earnings season, numerous firms have issued downbeat outlooks. FedEx Corp mentioned labor shortages drove up wage charges and extra time spending, whereas Nike Inc blamed a supply-chain crunch and hovering freight prices because it lowered its fiscal 2022 gross sales estimate and warned of holiday-season delays.

“The tempo of development is decelerating, however nonetheless it is at a significant degree,” mentioned Terry Sandven, chief fairness strategist at U.S. Financial institution Wealth Administration. With the product and labor shortages and inflationary pressures, “we’ll be trying to see to what extent demand is there, and what does it imply for the necessary vacation spending interval.”

Analysts see a 29.6% year-over-year enhance in earnings for S&P 500 firms within the third quarter, in line with IBES information from Refinitiv as of Friday, down from 96.3% development within the second quarter. The third-quarter forecast is down a contact from a number of weeks in the past, a reversal of the current pattern for estimates.

Third-quarter earnings development was at all times anticipated to be a lot decrease than the blowout acquire of the second quarter, when firms had a lot simpler year-ago comparisons due to the pandemic.

“We had been going up at such a excessive clip. The optimistic revision momentum has lapsed,” mentioned Nick Raich, CEO of unbiased analysis agency The Earnings Scout.

Earnings season is kicking off this week with the massive banks together with JPMorgan Chase .

Reuters Graphics

SUPPLY CHAINS, COSTS

Buyers are weighing the influence of sharply increased power prices on companies and customers after a current surge in oil and pure gasoline costs. Whereas increased power costs ought to be a boon for power producers, they’re an inflationary threat for a lot of different firms like airways and different industrials and reduce into client spending.

U.S. firms have to date this yr stored revenue margins at document ranges as a result of they’ve reduce prices and handed alongside excessive costs to prospects. Some traders are anxious to see how lengthy that may go on.

Third-quarter earnings arrive with the market nonetheless wobbly after a weak and unstable September. The S&P 500 in September registered its largest month-to-month share drop because the onset of the pandemic in March 2020. It was additionally the index’s first month-to-month decline since January.

Analysts are skeptical about how a lot is priced in.

“COVID-related provide chain points have unfold past client items. And longer-term indicators of world friction are simple to seek out,” Savita Subramanian, head of U.S. fairness & quantitative technique at BofA Securities, wrote in a word on Friday. However she mentioned these points are removed from being absolutely priced into shares.

Morgan Stanley’s analysts say that consensus earnings expectations additionally haven’t absolutely priced within the supply-chain constraints going through firms, making it a lot tougher for firms to surpass estimates on the identical charge as in current quarters.

“Client Discretionary firms of all types are proper within the cross hairs of the provision shortages, increased logistics prices and better labor prices,” they wrote. These strategists see the fairness market set for a much bigger pullback, and say third-quarter earnings may decide how deeply the inventory market dips.

Reporting by Caroline Valetkevitch in New York
Modifying by Megan Davies and Matthew Lewis

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