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

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

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Earnings expectations are still rising but slowing down as the economy is slowing down due to supply constraints, China housing crisis, and the global energy crisis. The Q3 earnings season will be all about rising input costs and how it is driving margin pressures that could lead to many profit warnings. This is probably going to be one of the most exciting earnings season in many years.


Despite growth expectations are coming down due to supply chain issues in Asia due to Covid-19 outbreaks, China’s housing market crisis, and an unfolding global energy crisis, sell-side analysts have raised their 12-month forward EPS expectation for S&P 500 by 6.3% in Q3. This is the slowest pace in expected earnings since they bottomed out in May last year.

08_PG_1
Source: Bloomberg

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.

08_PG_2

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.

08_PG_3

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.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.