Delta and Q3 Earnings Season

This story originally appeared on Zacks

While the earnings outlook has been excellent, the ongoing rise in Covid infections is starting to weigh on the near-term economy. Recent estimates for Q3 GDP growth have dropped sharply.
Although earnings estimates for Q3 have been not revised lower than the previous estimate, the trend in revisions has lost some of its momentum.
This chart shows the progression of earnings growth forecasts for Q3:

– Zacks

Zacks Investment Research
Image Source: Zacks Investment Research

We see that the trend is still positive but seems to have stopped since late July. The number of Q3 revisions that are positive is significantly lower than what was seen during the three previous earnings seasons.
The emerging slowdown in the economy is likely to be responsible for this loss of momentum, which is also likely to be a result of the Delta variant. The current GDP growth estimates are at +3%, roughly half the rate of growth expected just a few months ago.
A rising cost trend in inputs, labor and freight/logistics is also a factor that will impact the margin outlook. We need to be vigilant.
According to the Fed, this trend is “transitory”, and it’s a result of Covid-related disruptions. The market seems to be in agreement with that assessment. As you see below, this view has been reflected in consensus estimates.

Zacks Investment Research
Image Source: Zacks Investment Research

The “transitory view” of ongoing cost pressures becomes even more apparent in the annual picture of margins, as shown below:

Zacks Investment Research
Image Source: Zacks Investment Research

All of us know the implications that “transitory” debates have on Fed policy. This is just as relevant for the market, as it is for outlook for earnings or margins.
Q3 and Beyond: Expectations
Not only did the earnings season 2021 Q2 see a high rate of earnings growth, but total earnings reached an all-time record quarterly, exceeding the previous record. The Q2 earnings season saw other positives, including the strength in all key sectors as well as the significant momentum on the revenue side.
The unusually high rates of growth in the first and second quarters won’t continue into the third quarter. This is because they were a direct comparison to periods earlier this year that had been severely affected by Covid-related disruptions. Comparations will remain relatively consistent in 2021 Q3-2021, as the U.S. economic system had opened up during the previous year and thus the anticipated slowdown in growth.
The chart below shows the expected slowdown in growth. It places 2021 Q3 revenue and earnings growth projections in context of the growth in the previous four periods and estimates for the next three quarters.

Zacks Investment Research
Image Source: Zacks Investment Research

A similar picture is also available on an annually basis. As you can see from the chart:

Zacks Investment Research
Image Source: Zacks Investment Research

As we mentioned, the 2021 aggregate Q2 earnings total was a record for quarterly results. The chart below shows this, highlighted with the four quarters of 2018.

Zacks Investment Research
Image Source: Zacks Investment Research

The pandemic has impacted large areas of the economy. Companies in this sector are still making significantly less money than in pre-Covid. Many of these businesses are unlikely to return to pre-Covid profitability for at least one year.
It is remarkable that the records in earnings for each quarter were not made possible by these important parts of the economy.
The Earnings Season is Underway
We’ll be countingOracle’s ORCLReport after Monday’s market close, on September 13th to begin the first quarter of Q3 earnings season.
We will receive results from Oracle’s fiscal quarter that ended in August. These numbers are part of the Q3 earnings total. There are many other bellwether operators, such as FedEx FDX,Nike NKE,Costco COSTOther companies will release their August quarter fiscal results within the next few days.
The time JPMorgan JPMOther big banks will start reporting September quarter results October 13th. We’ll have August-quarter results almost from two dozen S&P 500 members.
Our weekly earnings report provides a comprehensive overview of the current situation, as well as the outlook for the future.>>>>Earnings Trends Report Looking ahead to Q3 Earnings Season

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Publiated Fri, 10 Sep 2021 at 23:08:03 +0000

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