Earnings Watch: Q3 earnings season is all about rising input costs

We are coming into the Q3 earnings season with elevated equity valuations and all-time high profit margins, and a growing list of pressure points for companies with wage pressures accelerating, supply constraints pushing up prices and now lately higher energy costs. Companies such as FedEx, Nike, and Bed Bath & Beyond have already fired warning shots of rising input costs and pressure on margins. We had expected this theme to dominate with Q4 earnings release in January, but we believe Q3 earnings will be all about input costs and warnings on margins which will surprise many investors.

The rising input costs for companies operating in the physical world will once again pressure companies in the industrial, consumer staples, and consumer discretionary sectors. We expect digital companies to do well as they generate higher amount of revenue and profits per energy input used and they often deliver their services over the Internet making them more immune to the global supply disruptions. Essentially another quarter that will show investors why betting on digital companies is good for returns, but it will only amplify the pressure on taxing digital companies and starve off physical companies of investments.

US financials will drive price action next week

The list below shows the most important earnings releases to watch next week with our focus on Delta Airlines, JPMorgan Chase, Bank of America and Citigroup.

Tuesday: Fastenal

Wednesday: Delta Air Lines, JPMorgan Chase, BlackRock, First Republic Bank

Thursday: Fast Retailing, Bank of America, Wells Fargo, Walgreens Boots Alliance, Morgan Stanley, Citigroup, UnitedHealth, US Bancorp, Progressive, Domino’s Pizza

Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial

Delta Air Lines is expected to deliver Q3 revenue of $8.4bn up 175% y/y and its first profitable quarter since the pandemic started with EPS expected at $0.18, and EBITDA at $945mn translating into a healthy 11.2% operating margin. The key focus is naturally the rising fuel costs associated with the ongoing global energy crisis but also on how the uptake on air passengers look like in post pandemic world with vaccinations.

Among the banks and investment banks we focus on JPMorgan Chase for the full picture, and Bank of America for understanding the underlying credit dynamics and loan demand situation in the US, and Citigroup is interesting because of its emerging market tilt. Morgan Stanley and Goldman Sachs are often not interesting given JPMorgan Chase is most of the time a good indicator on investment banking for quarter. Analysts expect a tough quarter for US banks q/q as activity is normalizing across consumer and commercial banking while investment banking activity has not run abnormally high in Q3. Key focus for banks is their outlook for interest rates and any comments on inflation and how it is impacting their customers.