SUMMARY: The largest week of earnings reporting season is behind us, and companies are still reporting stronger earnings and sales surprises than is typical historically. Index EPS have been revised strongly higher are now on pace to expand 38% (up 10pp from the start up reporting season) in 3Q, brining full year 2021 estimates up to $202 (+46% y/y).
Supply chain sentiment has dropped significantly this year as production and shipping have been disrupted by COVID waves and spiraling freight prices at the same time consumer demand has been booming. Pricing sentiment expressed during S&P earnings calls has skyrocketed to its highest level since 2003, the start of the measurement. Supply chain issues have been a factor pushing inflation and inflation expectations higher. Supply chain issues and pricing pressures are pushing earning factors and financial sentiment lower.
Earnings factor sentiment within Technology has turned negative recently, following the trend set by more than half of the GICS sectors. Put simply, there has been a broad deterioration of earnings sentiment. At the same time, strong earnings, increasing fiscal support and above trend growth are helping push index level equity prices higher. Supply chain issue remain a micro trend and that will make pricing power and the outlook for profitability increasingly important in driving market internals.
Margin sentiment of the overall S&P has fallen in 3Q October, though most sectors still have overall positive sentiment readings towards margin results (current data) and margin commentary (forward looking expectations). In aggregate, management at Cyclical companies are more positive about their profit outlook than are Defensive firms. So far in reporting season, the spread between Cyclical company margin commentary sentiment has reach a neat all-time high relative to Defensive margin sentiment.
Strong margin sentiment, along with strong expected future earnings growth and firm global economic demand, help explain why Cyclicals have continue to outperform Defensives over the past few months. Sentiment internals suggest that trend will likely continue.
SUPPLY CHAIN SENTIMENT: Last week 162 stocks published 3Q earnings, counting 1/3 of the S&P index and 47% of the total market cap. With reporting season more than half-way over, earnings factors and financial sentiment of the S&P companies measured using the Amenity natural language processing (NLP) tool has deteriorated. Companies are still reporting stronger earnings and sales surprises than is typical historically. Supply chain issue, rising inflation and increasing commodity prices all lead to more uncertainty about future earnings.
We have mentioned that supply chain sentiment has dropped significantly this year as supply being disrupted by the Delta wave and hiking freight price. Pricing sentiment expressed during S&P earnings calls has skyrocketed to its highest level since 2003, the start of the measurement. Supply chain issues have been a factor pushing inflation and inflation expectations higher. Supply chain issues and pricing pressures are pushing earning factors and financial sentiment lower.
At the sector level, Technology is still showing stronger financial sentiment than all other sectors followed by Energy. Staples are showing the worst financial sentiment. Earnings factor sentiment within Technology has turned negative recently, following the trend set by more than half of the GICS sectors. Put simply, there has been a broad deterioration of earnings sentiment.
Margin sentiment of the overall S&P has fallen in 3Q October, though most sectors still have overall positive sentiment readings towards margin results (current data) and margin commentary (forward looking expectations). Supported by the recovery of Oil prices, Energy has recorded the best margin result sentiment and has promising forward margins as well, with margin commentary sentiment the second only behind REITs.
In aggregate, management at Cyclical companies are more positive about their profit outlook than are Defensive firms. So far in reporting season, the spread between Cyclical company margin commentary (outlook) sentiment has reach a neat all-time high relative to Defensive margin sentiment. A number of high profile Staples companies cited supply chain problems as a headwind for profits.
Weakness in Staples names are a risk, but the sector’s expected contribution to earnings is modest over the next few years. General deterioration of supply chain sentiment across the index is a larger source of concern. The widening gap between Cyclicals earnings and supply chain sentiment and that of Defensives, is another indication that for now, supply chain disruptions are more of a micro (stock/sector picking) issue than a macro (causing index weakness) issue.
Regarding Tech, the Put – Call Open interest of FAAMG names has increased toward a new all-time high. Five mega cap Tech names published their earnings last week and FB, AMZN and AAPL all missed sales expectation and underperformed the S&P the following day after their reports. Though Tech enjoys both Cyclical and Growth tailwinds real yield remains extremely negative, and headwinds facing the group are accumulating.
The performance of factors remains tilted towards Momentum and Growth over the past month at the expense of Value, with Momentum of Price the best performing factor as market rebound. Value has been the worst performance both in October and since the second half of this year.
