Investors will have a lot to contend with come the start of third quarter earnings season this month, most of which could prove far from flattering to one’s portfolio.
That’s the latest temperature check on markets from the team over at Goldman Sachs.
The investment bank’s chief U.S. equity strategist David Kostin warned on Monday of four risks to investors from upcoming corporate earnings reports: (1) supply chain bottlenecks; (2) climbing oil prices; (3) inflationary labor costs; and (4) slowing China economic growth.
Kostin reserves his most worrisome comments on all things supply chain.
The strategist found that of the 26 S&P 500 companies that have reported results since the start of September, 18 mentioned supply chain challenges on their earnings calls. Several of those names that have letdown investors in recent weeks due to supply chain bottlenecks include Nike and Bed Bath & Beyond.
Sherwin-Williams, on the other hand, pre-announced disappointing third quarter results and slashed its full-year outlook.
“A key risk is that supply chain normalization takes longer than expected and that unmet demand today is not fully recouped in later quarters,” Kostin says.
The risks outlined by Kostin stand to make third quarter earnings season vastly different than the second quarter.
Analysts expects S&P 500 earnings growth of 27% year-over-year for the third quarter, down sharply from the second quarter growth rate of 88%. Net profit margins for the S&P 500 in the quarter are seen at 11.6%, below the 12.2% reached in the first half of 2021.
Adds Kostin, “Economic and earnings growth are decelerating and base comparables have become more challenging.”
The market may be finally beginning to take warnings on corporate fundamentals from the likes of Kostin more seriously.
Monday saw stocks hit with a fresh dose of heavy selling, led by further blood-letting in the high growth Nasdaq Composite. All of the Dow components were in the red by midday, save for relative safe-havens Verizon, Merck and IBM.
Not aiding sentiment Monday are concerns about the pace of job growth last month, which will be reported on Friday.
“I think there would be a negative market reaction [if the jobs report misses estimates], to be honest with you. We were above consensus last month and were surprised to the downside. I think if you were to get another weak print, people would start to wonder about the cumulative effects of the COVID variants on economic growth. We would probably get people questioning whether the Fed is going to be able to taper on their schedule if we were to get another weak print on payroll. It’s a very important report,” said UBS head of equity derivatives research Stuart Kaiser on Yahoo Finance Live.