Investors will have a lot to take in as Q3 earnings season begins this month, most of which could prove anything but flattering to their portfolios.
This is the latest temperature reading of the markets from the Goldman Sachs team.
The investment bank’s chief US equity strategist, David Kostin, warned Monday of four risks for investors from upcoming corporate earnings reports: (1) supply chain bottlenecks; (2) rising oil prices; (3) inflationary labor costs; and (4) slowing economic growth in China.
Kostin reserves his most concerning comments on any supply chain issue.
The strategist found that of the 26 S&P 500 companies that have reported results since early September, 18 mentioned supply chain challenges in their earnings calls. Some of those names that have let investors down over the past few weeks due to supply chain shortages are Nike and Bed Bath & Beyond.
Meanwhile, Sherwin-Williams pre-announced disappointing third-quarter results and lowered its full-year outlook.
“A key risk is that supply chain normalization may take longer than expected and that demand unmet today may not be fully met in later quarters,” says Kostin.
The risks outlined by Kostin will cause the Q3 earnings season to be very different from Q2’s.
Analysts are expecting S&P 500 earnings to grow 27% year over year in the third quarter, well below the 88% growth rate in the second quarter. Net income margins for the S&P 500 for the quarter are 11.6%, down from the 12.2% achieved in the first half of 2021.
Kostin adds, “Economic and earnings growth are slowing and baseline comparisons have become more difficult.”
The market may finally be starting to take warnings about company fundamentals from the likes of Kostin more seriously.
On Monday, stocks were hit by a fresh dose of strong selling led by more bloodshed in the high-growth Nasdaq Composite. All Dow components were in the red through midday except for relatively safe havens Verizon, Merck and IBM.
What doesn’t support sentiment on Monday are worries about the pace of job growth over the past 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. We’ve been above consensus for the past month and have been surprised by the downside. I think if you got another weak push people would wonder about the cumulative impact of the COVID variants on economic growth. We’d probably have people wondering if the Fed would be able to scale back its schedule if we got another weak payroll count. It’s a very important report,” Stuart Kaiser, UBS Head of Equity Derivatives Research, said on Yahoo Finance Live.
Brian Soci is a freelance editor and Anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.
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